There's no denying it's been a challenging year, with all three major U.S. stock indexes falling into a bear market. But Berkshire Hathaway (BRK.A -2.04%) (BRK.B -1.96%) CEO Warren Buffett has seen his fair share of bear markets and stock market corrections throughout history and has managed to vastly outperform the broader market.

The Oracle of Omaha's formula for success has primarily been to buy time-tested, profitable companies and allow his investment thesis in those businesses to play out over the course of years, if not decades.

Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

However, value plays a key role, too. With few exceptions (i.e. the stocks purchased for Berkshire Hathaway's portfolio by Warren Buffett's "investing lieutenants," Todd Combs and Ted Weschler), Berkshire's investment portfolio is packed with value stocks trading well below their intrinsic value. As we get ready to turn the page on a tumultuous year, the following three stocks stand out as some of the biggest bargains in Warren Buffett's portfolio for 2023.

Bank of America: Forward price-to-earnings ratio of 8.8

One of the more plain-as-day bargains hiding in plain sight is Warren Buffett's second-largest holding: Bank of America (BAC -1.48%). This money-center giant checks in at a forward-year price-to-earnings (P/E) ratio of less than 9, based on Wall Street's consensus for 2023.

The biggest concern for bank stocks at the moment is the growing likelihood that the U.S. will enter a recession in 2023. The rapid ascent of interest rates and the largest inversion of the interest rate yield curve in four decades serve as ominous indicators that the U.S. economy will shift into reverse. When recessions arise, it's not uncommon for banks like BofA to see loan delinquencies and charge-offs climb. As a result, banks have to set aside reserve capital to cover these losses, which lowers their profits.

But even if the U.S. were to dip into recession at some point in the near future, this would be unlike any recession in the past. Whereas the Fed has come to Wall Street's rescue via monetary easing in the past, it has no choice but to aggressively stamp out inflation. As interest rates climb, financial institutions with outstanding variable-rate debt benefit.

Among large bank stocks, none is more interest-sensitive than Bank of America. Its net interest income has increased by $2.7 billion over the trailing-12-month period, ended Sept. 30, 2022, and the company estimates that another 100 basis-point parallel shift in the interest rate yield curve would generate $4.2 billion in added net interest income over 12 months. In other words, this boost in interest income can more than offset loan losses and grow earnings per share for BofA through a possible recession.

Bank of America's digital push has made it more efficient as well. When the third quarter came to a close, 48% of all sales were completed digitally (online or via mobile app), while Zelle transactions (167 million) handily outpaced written checks (116 million). As more consumers shift to digital banking, Bank of America can lower its noninterest expenses by consolidating some of its physical branches.

General Motors: Forward price-to-earnings ratio of 6.4

Arguably the biggest bargain for 2023 in Warren Buffett's portfolio, at least based on a forward P/E ratio, is auto stock General Motors (GM -0.55%). Investors willing to stomp the accelerator can buy shares of GM for a little over 6 times Wall Street's consensus earnings for the upcoming year.

Like most industrial companies, General Motors is contending with a slew of headwinds. This includes historically high inflation increasing material and labor costs, growing competition in the electric vehicle (EV) space, and pandemic-driven supply chain issues. The latter has been particularly troublesome, with GM having to halt or reduce production on select models for weeks at a time. The good news is that none of these issues alters GM's long-term growth strategy.

For the better part of two decades, GM investors have been waiting for the next organic catalyst to fuel growth. The electrification of consumer vehicles and enterprise fleets can do just that for decades to come.

According to CEO Mary Barra, GM will have the capacity to produce in excess of 1 million EVs annually in 2025, and should have three battery plants up and running by 2024. With $35 billion earmarked for EV and battery investment through mid-decade, the company aims to roll an aggregate of 30 new EV models off assembly lines worldwide. During the third quarter, Barra notes that General Motors gobbled up 8% of U.S. EV share. 

Of course, it's not just the U.S. that offers General Motors a significant growth opportunity. In each of the past two years, GM and its joint ventures have sold 2.9 million vehicles in China, the world's largest auto market. China's EV industry remains nascent and ripe for disruption. With more than half of all new vehicle sales in 2035 expected to run on alternative energy in China, GM is well positioned to become a leading international player. 

A bank teller handing cash to a customer on the other side of the counter.

Image source: Getty Images.

Citigroup: Forward price-to-earnings ratio of 7

A third big bargain for 2023 in Warren Buffett's portfolio is money-center bank Citigroup (C -1.25%). Yes, another bank stock. Investors willing to take the plunge can scoop up shares of the company for just 7 times Wall Street's forecast earnings for next year.

Although Citigroup is facing some of the same headwinds as Bank of America -- the prospect of rising loan delinquencies and charge-offs as the likelihood of a domestic and/or global recession grows -- it also has unique issues. Namely, the company has faced more than a decade's worth of litigation and fines tied to its dealings and internal controls during the financial crisis (2007 to 2009). It's absolutely paramount this legal overhang is put in the rearview mirror for good.

In March, Citigroup laid out a multiyear transformation that involves simplifying its operating structure and leveraging its existing network by accelerating its spending on technology. By becoming more reliant on artificial intelligence and digital lending, among other financial technology tools, Citi can improve the internal controls that once got it into trouble, while benefiting from the lower costs of financial service automation. 

To build on this point, Citigroup announced plans to exit its global consumer banking operations in more than a dozen markets outside the United States. When all of its international sales are complete, the company will have extra capital on hand to weather a possible economic downturn and/or reinvest in the technology that'll help it lower its long-term operating costs.

It's also worth pointing out that Citigroup should continue to be a beneficiary of higher interest rates (albeit not on the same level as BofA). On a year-to-date basis, Citi's $35.4 billion in net interest income is a 12% improvement from the prior-year period. 

Although Citigroup presents with a far more challenging outlook than the other two companies on this list, it has the ability to deliver for patient shareholders.