Warren Buffett's Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) is crushing the market this year as value and dividend stocks have pulled the spotlight away from growth stocks.
Berkshire Hathaway's success inspired plenty of investors to flip through its holdings in search of stock picks and kernels of wisdom. And while there are definitely insights to be gleaned from Buffett's investing moves, it's important to align your portfolio with your own risk tolerance and time horizon.
As such, you may want to pick and choose just a handful of Buffett's stocks to add to your portfolio instead of trying to replicate Berkshire Hathaway's holdings. And in the views of three Motley Fool contributors, Coca-Cola (KO 0.68%), Chevron (CVX 0.75%), and Kraft Heinz (KHC 0.57%) stand out as Buffett stocks worth buying in December.
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One of the most reliable companies on the planet
Daniel Foelber (Coca-Cola): Buffett is known for focusing on value stocks that generate steady returns over time. Yet his "cigar butt" investing days are long behind him.
Today, Berkshire Hathaway's equity portfolio is concentrated in blue chips, many of which trade at market premiums. Coca-Cola is one that the conglomerate has owned for decades, and it remains one of its top-five holdings.
The beverage company's premium valuation is the pinnacle of what the market will pay for consistency. Coke has a price-to-earnings ratio of 27.4, which is even higher than Apple's ratio of 24.2.
Even more surprising than its current ratio is that its 10-year median price-to-earnings ratio is 27 -- which is far higher than the average ratio for the S&P 500, which has tended to land in the 15 to 25 range over the last 10 years.
Investors may wonder why such a stodgy low-growth company commands this type of market premium. I think the best answer is that Coke does exactly what its investors want it to do: It operates an incredibly profitable business no matter the market cycle, and generates consistent returns and excess free cash flow that management can use to buy back shares and raise the dividend. And it maintains a rock-solid balance sheet. Despite its size, these characteristics make Coke a uniquely lean business because it makes so much more money than it needs -- even during recessions.
Coke's ability to bridge the gap between investor expectations and reality is a rare commodity, especially during a bear market. Because no matter how bad the economy gets, folks are unlikely to cut spending on little pleasures like an ice-cold Coke product. And that brand power is worth the premium price.
The cherry (Coke) on top of the investment thesis for Coke is that it's a Dividend King that has raised its payouts annually for 60 consecutive years. At its current share price, the stock has a 2.8% yield, making it a respectable source of passive income.
Chevron offers dividends and exposure to oil
Lee Samaha (Chevron): Berkshire Hathaway has significant positions in Chevron and Occidental Petroleum -- they represented two of its top six holdings in autumn 2022. While the success of its Occidental trade depends partly on the timing of its acquisition of Anadarko Petroleum, the Chevron position comes down to good old-fashioned Buffett investment strategy.
Like other Buffett holdings such as chemicals company Celanese, Chevron's earnings are cyclical and fluctuate significantly over time. Given its exposure to energy prices, that's likely to remain a core feature of the company's financial situation, so if you aren't confident in the case for fossil fuels, then Chevron is best avoided.
Data by YCharts.
Still, Buffett has never shied away from investing in cyclical stocks, provided the underlying business was in good shape and management kept the company in good financial condition.
Chevron, with its 35-year streak of dividend hikes, ticks all the boxes. While the majority of its earnings come from upstream (exploration and production) activities ($15.8 billion in 2021), its downstream (refining and distribution) activities ($2.9 billion in 2021) help to reduce the cyclicality of its earnings. Moreover, Chevron tends to run with a conservative balance sheet. Even when the oil prices are relatively low (putting earnings under pressure), Chevron's net debt-to-EBITDA (earnings before interest, taxation, depreciation, and amortization) ratio is manageable.
Data by YCharts.
Meanwhile, Chevron continues to use cash flows from its traditional energy businesses to invest in lower-carbon activities such as renewable fuels and carbon capture to keep it relevant as the world makes the transition toward greater use of clean energy. As such, the stock represents a good option for investors looking for oil exposure and dividend growth.
Feast your eyes on this savory selection
Scott Levine (Kraft Heinz): As the S&P 500 has slumped this year (it's down by nearly 17% year to date as of this writing), investors have been on the prowl for resilient stocks that can withstand the downturn -- and provide some dividend income to boot. Plenty of companies fit that bill, but Kraft Heinz is one that should certainly be high on investors' lists. Offering a forward yield of 4.1% at its current share price, Kraft Heinz stock has withstood 2022's turbulence well, rising by nearly 7%.
Open your pantry or fridge, and you'll surely find some labels from the Kraft Heinz portfolio. Investing, however, isn't a popularity contest. Prospective shareholders of Kraft Heinz, however, needn't worry that the company doesn't offer a worthy investing opportunity. Generating strong free cash flow, Kraft Heinz can return capital to shareholders via dividends.
KHC Free Cash Flow Per Share (Quarterly) data by YCharts.
Investors may be discouraged by the fact that its quarterly payouts have remained steady at $0.40 per share since 2019. But Kraft Heinz shouldn't be the only dividend stock among one's holdings -- having a diverse range of dividend stocks is a smart approach to building a robust portfolio. Thus, carving out a niche for dividend stocks that are hiking their payouts is a savvy investing approach.
Fortunately for investors, now's a great time to pick up shares of Kraft Heinz. The stock's trading at 10.9 times operating cash flow -- a discount to its 5-year average cash flow multiple of 25.1.
