It's not a bad idea to check what stocks Warren Buffett's Berkshire Hathaway owns. A $1,000 investment in the company in 1965, when he took over, would have been worth $36 million through 2021.
Keep in mind that many of Berkshire's stocks were not selected by Buffett, but were chosen by one of his investing lieutenants, Ted Weschler and Todd Combs, who have also have an impressive investing record. However, it's usually not clear who picked what.
That said, three Motley Fool contributors recently picked three consumer-related stocks from Berkshire's holdings that are timely buys at the start of 2023. Here's why they like Apple (AAPL 5.98%), Kroger (KR -0.56%), and RH (RH 4.98%).
Buffett's new favorite
Jeremy Bowman (Apple): For years, Buffett avoided tech stocks, saying he couldn't confidently predict future cash flows in the industry.
However, Berkshire Hathaway began buying Apple in 2016, and the Oracle of Omaha has fully embraced the iPhone maker, calling it "probably the best business" in the world.
Apple has become Berkshire's largest holding, representing close to half of its stock portfolio as of the end of the third quarter, and it's easy to see why Buffett has become a big fan of the tech giant.
Apple's economic moat is huge and self-evident. It has an installed base of roughly 2 billion active devices, which form a network of competitive advantages as the devices work best when used together. You can share information through iCloud, for example, and wearables such as AirPods are designed to pair with an iPhone. Apple's App Store unites its devices through a high-margin services business as the company generally takes a 30% commission on money spent in the App Store.
The company's brand and product quality also allowed it to maintain pricing power and high margins on its devices. It continues to gain market share on Android and is the phone of choice among the youngest customers in the U.S., indicating a strong growth pipeline.
Like other tech giants, Apple is expected to see slow growth this year in response to recessionary headwinds. Even so, the company is making smart moves to plan for the next stage of growth, recently announcing that it would design its own chips in a range of hardware components, bringing business that had been outsourced to chipmakers in-house, which should help boost the company's margins. It's also expected to unveil a new mixed-reality headset in June, according to Bloomberg, which could unlock a new revenue stream for the company.
Currently, the stock trades at a price-to-earnings ratio of 22, only slightly more expensive than the S&P 500 average. Considering its manifest competitive advantages, and ability to grow and expand margins over the long term, that price looks like a great entry point for investors.
Your local grocery store is a great investment
John Ballard (Kroger): Local grocery stores have a lot of advantages serving a large pool of customers within a near proximity. Kroger has capitalized on this position with consistent financial results despite uncertainty in the economy. Management is aiming to deliver annualized shareholder returns between 8% and 11% over the long term. However, the stock trades at a low multiple of earnings, which makes it a solid buy in 2023.
The sky-high inflation over the last year hasn't hurt Kroger's business. It's actually brought more good for the company's growth, since eating at home is much less expensive than dining out. In the most recent quarter, Kroger reported comparable sales, or what it calls identical sales, of 6.9% over the year-ago quarter. Adjusted earnings grew even faster at 12.8%, which is better than management's long-term goal to grow earnings between 3% and 5% per year.
Kroger is a profitable and durable business with growth opportunities. It generates a very slim profit margin, but it reinvests into the stores to drive traffic. That churns out higher revenue and profits, which also fuels investment in higher-margin revenue streams, such as private label brands.
Kroger can do all that while also distributing dividend payments to shareholders. Over the last four quarters, it paid out more than a third of its earnings per share in dividends, bringing the yield to about 2.04%. Combine this above-average dividend yield with a cheap price-to-earnings ratio of 11 based on forward earnings estimates and it all adds up to a solid stock to hold in this rocky market environment.
Getting ready for a big comeback
Jennifer Saibil (RH): RH had a huge setback at the end of 2022 as inflation cut into its sales and disrupted its margins. Even as many stocks are showing signs of recovery a few weeks into 2023, RH stock remains down about 30% over the past year.
But this looks like an excellent opportunity, and it's a classic Buffett move. RH stock looks significantly undervalued. It trades at less than 12 times trailing-12-month earnings, which is cheap even in this market.
Yet it has outperformed the broader market over time, in fact by huge amounts, under better circumstances.
Considering its business model and opportunities, RH has enormous potential to do that again.
RH sells luxury furniture, but the company has embarked on a process of becoming a leading luxury brand. Its core business is selling upscale products through its galleries in select affluent communities and its web portal. It has developed several exclusive lines that cater to this niche, with the advantages of high margins and a resilient clientele that has spending money even when the economy is volatile.
Also, RH branched out into luxury experiences, including several high-end restaurants, a guesthouse, and yacht and jet rentals. It recently hired well-known editor Margaret Russell to direct RH Media.
The company has resisted changing its strategy for the short-term benefits of raising sales through promotions. It has, even more so, continued to implement its efforts to build its premium brand through several acquisitions.
The risk here is that business doesn't come back so quickly, and that will depend on the state of the economy. But with sales down, year-over-year comparisons are in its favor. Any progress is likely to result in a higher stock price even if the economy remains pressured, and strong sales could lead to a surging stock. Whether or not that happens in 2023, RH stock looks like an outstanding long-term opportunity to create shareholder wealth.
