With the Federal Reserve's recent announcement that it would likely be on a glidepath to higher interest rates than it originally thought, the stock market resumed the downward trajectory that it has been on throughout most of 2022. As painful as that decline has been for existing shareholders, for people who have cash to put to work, lower stock prices are often opportunities to buy great companies at discount prices.
Over the decades, Warren Buffett has built an incredible reputation of doing just that -- of sweeping in to buy either shares of or the entirety of solid businesses at discount prices. For small investors, that opens up an opportunity somewhat akin to "if you can't beat 'em, join 'em." With that in mind, three Motley Fool contributors dug into companies in Buffett's portfolio to see if the market's recent carnage produced any bargains that might be worth buying today.
They came up with Activision Blizzard (ATVI), Amazon (AMZN -1.64%), and Buffett's own Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%). Read on to find out why and decide for yourself whether any or all of them just might be bargains worthy of a spot in your portfolio as well as Buffett's.
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Real profits from virtual worlds
Eric Volkman (Activision Blizzard): Here's a weird picture: Warren Buffett sitting on his couch, gazing intently at a large-screen TV while working a controller in his hand. On the screen, his avatar is mowing down bad guys as the fabled financier plays a first-person shooter video game.
One has to imagine such a tableau, since the famously Luddite Buffett probably doesn't spend his leisure time blasting away at virtual enemies.
That isn't stopping him from being deeply invested in the video game industry, however, as Berkshire Hathaway has amassed a chunky stake in Activision Blizzard. Berkshire is now a major player on the company's roster of shareholders, with a nearly 9% equity stake worth over $5 billion.
That investment represents something of a bet. In January, Microsoft offered to acquire Activision in a splashy, all-cash deal worth almost $70 billion. That shakes out to $95 per share, and thanks to the target company's sagging share price, it represents potential upside of almost 30%.
Many investors who aren't Buffett are skeptical that the deal will go through. This, combined with the general recent lack of enthusiasm for tech and tech-adjacent stocks, has kept Activision from approaching Microsoft's offering price.
But regulatory decisions are apparently coming soon in several jurisdictions. Yes, there are concerns about numerous issues -- how Microsoft/Activision will or will not support the cornerstone Call of Duty titles on Sony's PlayStation console, to name one, and the cloud hanging over Activision following its recent high-profile sexual harrassment case.
But the stakes are high here, and the wealthy Microsoft has plenty of experience negotiating and settling with regulators. I think Buffett and Berkshire's bet on the deal going through is well considered and likely to produce a tidy windfall for them.
Even if it doesn't, Activision has nowhere to go but up in improving its corporate culture. Aside from that its fundamentals are solid, and the latest Call of Duty title has been setting new sales records for the company. Investors should certainly consider following Buffett's lead on this stock.
This e-commerce giant is down substantially from its high
Parkev Tatevosian (Amazon): Unfortunately for shareholders of Amazon, the stock is down 45% in 2022. On the bright side, that's an opportunity for long-term investors to buy this Buffett stock at a discount. Amazon has struggled amid the economic reopening, where consumers have shifted their spending toward away-from-home experiences like restaurants, travel, and theme parks.
That said, Amazon has grown revenue at a compound annual rate of 25.6% over the last decade as it has attracted millions of new customers. During that time, its operating profit margin expanded from 1.1% to 5.3%. Admittedly, the company will continue to face headwinds in the near term as consumers unleash pent-up demand for the type of things they missed out on when they were cooped up at home. That's bad news for Amazon.
AMZN PE Ratio data by YCharts
Still, over the long run, a more significant percentage of overall sales will likely move online. Supporting that trend is the added convenience of e-commerce that brick-and-mortar stores cannot match. As the biggest online retailer in sales, Amazon is poised to benefit from that growth. Meanwhile, the steep sell-off in 2022 is giving investors a chance to buy Amazon stock at a price-to-earnings ratio of 84.66, considerably below the average valuation in the last five years.
Not even Buffett himself could completely avoid the market's wrath
Chuck Saletta (Berkshire Hathaway): When the market is behaving poorly, investors will often shift their stock purchases to rock-solid, stable businesses in order to attempt to avoid the worst of the troubles. Buffett's own Berkshire Hathaway is often considered one of those stocks. This is because it has a healthy balance sheet with a bunch of cash on it, a diversified portfolio of businesses across insurance and many other sectors, and a reputation as a money-generating powerhouse.
Yet despite that incredibly strong and well-deserved reputation, not even Berkshire Hathaway has managed to completely avoid the market's swoon in 2022. Although it has held up better than the market as a whole, even Berkshire Hathaway's shares have declined a bit so far this year. That gives you the opportunity to buy shares of one of the strongest companies in the market for less than you could have when this mess started.
From a value investor's perspective, Berkshire Hathaway's stock can be purchased for around 1.4 times its book value. That's not all that much ahead of the level where Buffett himself has been willing to buy back Berkshire Hathaway shares.
If Berkshire Hathaway's stock does fall substantially farther from here, absent an end-of-the-economy disaster, it might just turn today's reasonable discount into tomorrow's unbelievable bargain. That reality makes now a great time to consider dipping your toes into the one stock that makes up the absolute largest part of Buffett's own net worth.
Bargains don't last forever
Given that the Federal Reserve is expected to continue raising rates until inflation gets brought firmly under control, the market may very well remain jittery for at least a little while longer. Still, as October's rally indicates, when stocks get cheap enough, investors will swoop in to buy. That makes today a great time to at least look at companies like Activision Blizzard, Amazon, and Berkshire Hathaway and consider whether their declines so far in 2022 make them bargains worth buying today.
