Everyone would love to emulate Warren Buffett's investing record. From 1965 through 2022, a share of his company, Berkshire Hathaway, returned nearly 20% every year on average. That outsized growth over decades helped turned a $1,000 investment in 1965 into $37 million at the end of 2022.
The greatest investor of all time didn't earn those phenomenal returns by buying at the top and selling at the bottom. He followed his own advice by being greedy when others were fearful. Here's why three Motley Fool contributors believe now is the right time to buy shares of three Berkshire holdings, RH (RH -3.37%), Paramount Global (PARA -3.94%) (PARA.A -2.48%), and Louisiana-Pacific (LPX -0.49%).
RH looks wildly undervalued
Jennifer Saibil (RH): Sometimes a great value is staring you right in the face, but it can get camouflaged by the noise of near-term pressure and price movements. RH (formerly Restoration Hardware) sells luxury home furnishings, and sales have dipped year over year. That has sent its stock price plunging, and it's now down 31% over the past year, well below the S&P 500's 10% loss over the same period. At this price, shares trade at a price-to-earnings ratio of just 9.7, well below their five-year average of more than 40. Could that be a value trap? I don't think so, and neither does Buffett.
For starters, sales are still robust, well ahead of pre-pandemic numbers. RH is still posting positive net income and free cash flow, and it's in a fine cash position.
RH Free Cash Flow data by YCharts
Management has very deliberately chosen a strategy that puts it at a near-term disadvantage by deciding not to mark down its various products, which could generate higher sales in the pressured environment. Instead, it's focusing on a long-term strategy of building up its premium branding by maintaining price points and exclusivity, potentially losing a strata of some of its lower-income customers along the way. CEO Gary Friedman said in a press release in June last year, "We continue to believe our long-term investments will enable us to drive industry-leading performance over a longer-term horizon."
And it's stepping up those investments. It is introducing RH Couture, RH Bespoke, RH Color, RH Antiques & Artifacts, and RH Atelier, with a pipeline of other collections to roll out over the next few years. That's in addition to opening new U.S. showrooms and entering the European market.
RH stock looks like an excellent deal with strong future prospects, making now a great time to buy shares.
Paramount Global: It's time to get greedy with top media stocks
John Ballard (Paramount Global): Berkshire Hathaway has been adding steadily to its Paramount position over the last year. At the end of the fourth quarter, Berkshire held a position worth about $1.5 billion in Paramount stock. The shares have fallen 42% over the last year over a rough operating environment in the media industry that is only temporary.
Media companies have faced mounting obstacles due to the weak advertising market. This is pressuring revenue at Paramount's TV networks, including CBS. However, Paramount has one of the largest entertainment libraries in the industry, with a film catalog dating back a century. The company used that library to its advantage with the blockbuster Top Gun: Maverick.
Paramount has a few catalysts in 2023 that could prop up the stock price. Management is set to start raising prices for its flagship streaming service Paramount+, which at $4.99 per month would still be offering good value after a price hike. This will go a long way to boost profitability in the direct-to-consumer segment that has reported losses so far.
Management is focused on bringing costs down. The company sees this year as a peak investment year for content spending to position for long-term growth in streaming. Greater cost discipline going forward could lead to higher earnings and free cash flow than Wall Street expects. Moreover, a recovering ad market would greatly boost revenue and profits from the networks segment.
With the near-term uncertainties in the economy, analysts don't see any path to growth in 2023. Paramount posted a sluggish 5% growth in revenue in 2022, with earnings per share cut in half. Only 38% of Wall Street analysts rate the stock a buy, but Berkshire Hathaway is not concerned about temporary obstacles, because it's normal for the advertising market to experience occasional downturns.
What matters most is Paramount's long-term opportunities to monetize its leading media assets, including Showtime, Nickelodeon, MTV, Comedy Central, and Paramount Pictures. That potential is greatly discounted right now, especially with Paramount+ adding an impressive 9.9 million subscribers in the last quarter alone.
The stock is trading at less than 9 times the company's average annual free cash flow over the last five years. As Buffett has reminded investors, you pay a high price for a cheery consensus. Investors shouldn't pass up the once-in-a-decade opportunity to buy one of the leading media companies at a dirt-cheap price.
Louisiana-Pacific: This homebuilder stock is still a buy
Jeremy Bowman (Louisiana-Pacific): When I think of stocks to buy before the next bull market, I think of cyclical names, and one of the top names on the list of Berkshire Hathaway's holdings is Louisiana-Pacific, the largest maker of oriented strand board (OSB), a product similar to plywood and a key component in home construction.
Buffett and his Berkshire team like Louisiana-Pacific enough that they've bought the stock two quarters in a row, adding 1.25 million shares in the fourth quarter after an initial purchase of nearly 6 million in the third quarter.
As the leading producer of OSB, Louisiana-Pacific has a lot of characteristics of a classic Buffett stock. It has a competitive advantage as a category leader. It makes a product that is repeatedly "consumed" and is a necessary component in homebuilding. It's unlikely to be disrupted, and the stock trades at a good value as it's sold off following the collapse in the real estate market.
On a trailing basis, the stock is trading at a price-to-earnings ratio of less than 5. That's partly because profits were elevated by a spike in demand, but it also shows that the stock has the potential to rebound once the housing market returns to growth, and with a shortage of millions of homes in the U.S., that's likely to happen sooner rather than later.
Better yet, Louisiana-Pacific is also taking advantage of the profit boom and the low share price by buying back its stock, one of Buffett's favorite tactics. Over the last year, it's reduced shares outstanding from 88 million to 72 million, a decrease of 18%.
That will add to the company's upside potential when the housing market turns around and the next bull market starts.
