They say imitation is the sincerest form of flattery. So why not imitate one of the best when it comes to investing -- Warren Buffett.
Indeed, borrowing investment ideas from the Oracle of Omaha can be a great idea. If, that is, you're willing to follow the same long-term playbook that prioritizes value investing.
So, let's look at three value stocks held by Buffett's Berkshire Hathaway: TSMC (TSM +0.55%), RH (RH +2.85%), and Occidental Petroleum (OXY 1.09%).
Image source: The Motley Fool.
1. Taiwan Semiconductor Manufacturing Company
If you want to invest like Warren Buffett, borrowing from his bag of tricks is a great way to start. He has long favored companies in sectors with high barriers to entry, which brings us to my first pick: Taiwan Semiconductor Manufacturing Company, also known as TSMC.
TSMC is the world's largest semiconductor foundry. In fact, Counterpoint Research estimates that TSMC holds over 59% market share. TSMC's customers include Apple, AMD, and Nvidia, among others. Simply put, the world's semiconductor industry depends on TSMC, which is why recent tensions in Taiwan straight are so troubling. Any disruption of the company's operations could quickly cascade throughout the worldwide economy.
NYSE: TSM
Key Data Points
As a result, the U.S. and other western nations are investing in new semiconductor foundries located elsewhere. But, for now, the company remains a linchpin in the semiconductor supply chain.
As such, it's a lucrative business with fat margins. As of its most recent quarter (the three months ended on Dec. 30, 2022), the company had an operating margin of 49.5%, generating $17.5 billion in free cash flow. The company pays a relatively modest dividend of $1.77 per share, resulting in a dividend yield of 1.99%. However, what TSMC's dividend lacks in size, it makes up for in stability. The company has more than $43 billion cash on its balance sheet and no net debt.
2. RH
At first blush, RH looks like a strange stock for Buffett's Berkshire Hathaway to own. After all, a relative niche furniture brand seems slightly out of place among corporate icons like Coca-Cola, American Express, and Apple.
NYSE: RH
Key Data Points
It's true; RH is a small position for Buffett. Berkshire owns "only" 6.23 million shares worth $630 million. That's less than a quarter of 1% of the overall portfolio. Nevertheless, Berkshire has held the shares for more than three years, so there must be something appealing to Berkshire's management team.
Perhaps it's this: RH is a luxury furniture retailer with a sophisticated clientele that is largely immune to economic downturns. Similar to Lululemon, RH appeals to affluent consumers. And those shoppers are willing to pay up for refined home furnishings.
RH PE Ratio data by YCharts.
Moreover, RH sports a low valuation. The company's price-to-earnings (P/E) multiple is currently 9.7. Bear in mind that as recently as 2021, RH shares were trading with a P/E multiple above 60. Its three-year average multiple is 29.8.
The stock doesn't pay a dividend, but it is cash-flow positive, with over $323 million of free cash flow. Operating margins dipped recently but remain over 22%. Like all retailers, a severe recession would hurt the company. However, given its higher-end clientele, it's possible RH could escape the worst of a downturn. Either way, it's clear Berkshire continues to see value in this high-end retail name.
3. Occidental Petroleum
When it comes to valuation, you'll have to bend over backward to find a cheaper stock than my third pick, Occidental Petroleum (OXY 1.09%). The company recently traded at a rock-bottom P/E ratio of 4.7.
NYSE: OXY
Key Data Points
Even within the modestly valued energy sector, that's cheap. For comparison, energy mega-caps ExxonMobil and Chevron trade at P/E ratios of 8.8 and 8.2, respectively.
Like much of the energy sector, Occidental found itself behind the eight-ball when the COVID-19 pandemic crushed demand for oil and gas. However, as energy prices rebounded, so has Occidental. Shares are up 396% over the last three years.
OXY Total Long Term Debt (Quarterly) data by YCharts.
Part of the reason is that Occidental has been cleaning its balance sheet. The company reduced its long-term debt from $47.6 billion in 2020 to $19.2 billion. By lowering its debt burden, the company reduces the risk of raising capital by diluting its shareholders.
At any rate, oil around $75/barrel supports ample free cash flow for Occidental. The company generated $12.5 billion last year. What's more, the company announced a 38% dividend increase and a $3 billion share repurchase agreement.
For investors looking for a Berkshire-approved value stock, Occidental is certainly a name to consider.
