For nearly six decades, Berkshire Hathaway (BRK.A 0.41%) (BRK.B 0.11%) CEO Warren Buffett has been printing profits for his shareholders. Since the beginning of 1965, Buffett has led his company's Class A shares (BRK.A) to a robust average annual return of 20.1%, which works out to an aggregate gain of 3,641,613%, through Dec. 31, 2021. For those of your keeping score at home, this is a 120-times-greater total return than the benchmark S&P 500 over the same 57-year stretch.
In other words, riding the Oracle of Omaha's coattails has been a proven formula to build wealth for a long time. That's why looking to Berkshire Hathaway's investment portfolio during the current bear market decline makes so much sense.
What follows are three beaten-down Warren Buffett stocks that investors can confidently buy hand over fist in October.
The first Warren Buffett stock that's a screaming buy in October is payment processor Mastercard (MA -0.24%). Since hitting an all-time high earlier this year, shares of the company have tumbled 28%. For a stock that's been in a virtually unstoppable uptrend for over a decade, it's a big move lower.
Arguably the biggest headwind for Mastercard is that it's a cyclical company. Cyclical businesses ebb-and-flow with the U.S. and/or global economy. With most central banks cracking down on inflation by raising interest rates, and U.S. gross domestic product (GDP) retracing in the first two quarters of 2022, the prospect of a recession is growing in the U.S. and abroad. That would portend reduced consumer and enterprise spending, which would have a negative impact on Mastercard's revenue and profits.
But there are two sides to this coin. Although recessions and economic contractions are an inevitable part of the economic cycle, periods of expansion last significantly longer. Long-term investors are, therefore, able to take advantage of the natural growth of the U.S. and global economy through a payment-processing giant like Mastercard.
To build on this point, Mastercard has the enviable position of being the No. 2 player in the U.S., the top market for consumption in the world. As of 2020, Mastercard controlled 23% of credit card network purchase volume. Since this is a fee-driven business, higher inflation can actually help Mastercard's revenue since it tends to increase consumer and enterprise spending on a nominal-dollar basis.
There's plenty of opportunity overseas as well. Most of the world's transactions are still being conducted using cash. Since Mastercard has more than $5.9 billion in cash and cash equivalents, and it generated close to $10 billion in trailing-12-month operating cash flow, the company has more than enough in its coffers to organically or acquisitively move into underbanked emerging markets.
Lastly, Mastercard's success is a function of its lending avoidance. Although it would probably have no issue collecting interest income as a lender, doing so would expose it to the loan delinquencies and losses that arise during recessions. Not having to set aside capital for loan losses allows Mastercard to sustain profit margins above 40% and bounce back faster than most financial stocks following a recession.
The second Warren Buffett stock that's begging to be bought in October is regional bank U.S. Bancorp (USB 1.76%), which is the parent of the more-familiar U.S. Bank.
Similar to Mastercard, the skepticism surrounding U.S. Bancorp has to do with the weakening U.S. economy. Two consecutive quarters of GDP declines and rapidly rising interest rates sure looks like a recipe for higher loan delinquencies. It's not uncommon for banks to set aside capital to cover loan losses during economic downturns, which has a negative impact on earnings per share.
However, these are nothing more than short-term headwinds. U.S. Bancorp is able to benefit from disproportionately long periods of economic expansion and a number of operating advantages to grow over time.
For example, U.S. Bancorp's management team has wisely avoided the riskier derivative investments that caused trouble for many money-center banks. By choosing to focus on the bread-and-butter of banking -- growing loans and deposits -- U.S. Bancorp has delivered some of the highest return on assets among big banks and bounced back from economic downturns quicker than many of its peers.
Bank stocks are also prime beneficiaries of the U.S. central bank's hawkish monetary policy. As interest rates rise, banks with outstanding variable-rate loans should generate higher net-interest income without doing any extra work.
But the biggest operating advantage is unquestionably U.S. Bancorp's digital engagement trends. As of the end of May, 82% of active customers were banking online or via mobile app. What's more, 64% of total sales were completed digitally, which is up 19 percentage points from the beginning of 2020. Digital transactions cost a fraction of what in-person and phone-based interactions run, which has allowed for the consolidation of physical U.S. Bank branches and boosted the company's operating efficiency.
Investors have the opportunity to scoop up shares of U.S. Bancorp for just 8 times Wall Street's forecast earnings for the upcoming year, and can receive a hearty 4.6% yield for their patience.
To keep with the prevailing theme of this list, historically high inflation and a weakening U.S. economy have investors worried. Since Amazon generates the bulk of its sales from its online marketplace, there's the belief that high inflation and weaker growth prospects will dampen consumer spending. While this skepticism holds water in the very short-term, it has no impact on Amazon's growth prospects looking years down the road.
To say that Amazon's online marketplace is dominant would be an understatement. According to a March 2022 report from eMarketer, it's expected to bring in just shy of $0.40 of every $1 in U.S. online retail sales this year. For comparison, No.'s 2 through 15 in U.S. online retail sales market share are forecast to generate $0.31 of every $1 this year on a combined basis. This suggests Amazon's marketplace won't be unseated as the go-to direct-to-consumer retail platform anytime soon.
However, it's important to recognize that Amazon's online marketplace isn't critical to growing its operating cash flow or profits. Although it's the company's highest-revenue segment, online retail sales produce razor-thin margins. What's far more important for Amazon is that its other high-margin sales channels are humming along.
For instance, the company has been able to pivot the popularity of its online marketplace into more than 200 million global Prime subscriptions, as of April 2021. Amazon also has the exclusive rights to Thursday Night Football, beginning this year. With Prime members paying $14.99/month or $139/year, the company is generating $35 billion in annual run-rate subscription revenue. The high-margin cash generated from subscriptions can be put to work in its rapidly growing logistics network or reinvested in other fast-growing initiatives.
In terms of operating cash flow and profit potential, perhaps noting is more important than cloud infrastructure segment Amazon Web Services (AWS). Cloud growth is still in its early innings, and AWS accounts for nearly a third of worldwide cloud spending. Because cloud-service margins are so high, AWS has consistently generated over half of Amazon's operating income despite accounting for only around a sixth of its net sales.
If you need one more solid reason to buy Amazon stock, consider its valuation. Throughout the 2010s, investors willingly paid a multiple of 23 to 37 times year-end cash flow for Amazon shares. You can own shares of Amazon right now for about 8 times Wall Street's forecast cash flow for the company by mid-decade.