It's not too hard to get great ideas from investing legend Warren Buffett. Since 1965, his holding company, Berkshire Hathaway, has massively beaten the market with an annualized return of 19.8% versus 9.9% for the S&P 500 over that time period.
Some of Berkshire's equity positions look especially attractive right now, because their long-term potential is so compelling and their prices looks right. Amazon (AMZN 1.30%), Floor & Decor (FND 1.34%), and RH (RH 1.37%) are three stocks I would buy in a heartbeat.
1. Amazon: The varied earnings stream model
Amazon is the second-largest U.S. company by sales with $514 billion in trailing-12-month revenue. Although there's been a slowdown since soaring pandemic demand came to an end, sales still increased 9% year over year in 2022, or 13% without the negative impact of currency trends. Not to downplay any pressures Amazon is experiencing, but they needs to be assessed within the broader context of Amazon's performance and opportunities.
There are more than 200 million Prime members (and growing) who rely on Amazon for much of their shopping. Amazon is expanding its Buy with Prime service to many new merchants, moving it into the fintech sector. Amazon is not a payments processor itself, and it relies on companies like Stripe to power its digital payments capabilities. Buy with Prime competes with services like PayPal's and represents a huge revenue generation opportunity for Amazon.
Also in connection to Prime's value, in the fourth-quarter earnings call, management was focused on explaining how its investments in Prime video have been a strong driver of Prime signups. It's the cross-selling involved in many of Amazon's activities that creates a spiral effect in increased revenue.
Another business that's seeing momentum even in this environment is advertising, which was up 23% over last year in the fourth quarter. Amazon Web Services is also slowing down, but with a 20% increase, it's still a robust growth driver.
Amazon stock is down 40% over the past year, well below the S&P 500's 13% drop. That looks like a shortsighted view, and as long you have a long-term outlook, Amazon's dip could present a great buying opportunity.
2. Floor & Decor: Steady and consistent growth
Floor & Decor is a fairly young retail chain of superstores focused on flooring. Its wide variety and customer-centric service has helped it capture market share, and that has continued despite inflation and a housing slowdown.
Sales increased 24% in 2022, with a 9% increase in same-store sales. That's an important point, because it means not all growth is coming from new stores. It demonstrates the value of Floor & Decor stores to its customers, and implies that there are growth opportunities outside of more stores. It also indicates the company is creating a strong brand.
Earnings per share increased from $2.64 to $2.78, which is a feat in this pressured environment. However, its operating margin decreased 0.6%.
Floor & Decor sees a huge market opportunity for new stores. It opened 32 in 2022, ending the year with 191 total warehouses, but has a goal of operating 500 stores over the next eight to 10 years.
Management is anticipating more pressure this year, and it's guiding for sales to increase about 10% in 2023, with flat same-store sales. The outlook for EPS is about flat or a slight contraction. Long-term, however, the opportunity is massive.
Floor & Decor stock is down 6% over the past year. Shares trade at a price-to-earnings ratio of 33, well below their three-year average of 40. This stock has a huge growth runway and is trading at a compelling price point.
3. RH: Maintaining its premium branding
RH has gone through several overhauls over the years, rebranding from its original iteration of Restoration Hardware to the current RH, and recently transforming from a luxury furniture brand to a global luxury brand. This new strategy involves building out its business portfolio to include luxury experiences, such as RH-branded yachts, jets, and upscale restaurants. Its goal is to operate "an ecosystem of products, places, services and spaces."
Over the past few months, management has doubled down on its decision to keep its premium prices and not excessively mark down its products to clear out inventory and hike up sales. The goal is to focus on the long-term benefits of a premium brand, but there have been short-term benefits, too. One is the better margins that come along with higher prices and more full-price sales. In the 2022 third quarter, sales declined 13% from over $1 billion last year to $869 million this year. Gross margin, though, only contracted 0.5%.
Management noted that it's been almost two years since it sent a promotional email, and that "although the stark contrast in strategy may lead to a short-term risk of market share loss, we believe there is certain long-term risk of brand erosion and model destruction for those who choose the promotional path."
Instead, it's making acquisitions to bolster its move into a new direction. It sees an addressable market of $170 billion in home furnishings, and it plans to open design galleries in every major market. But it's looking way beyond that into offering fully furnished RH-branded homes with ancillary services. It's also launching RH Media, a content platform, to amplify its voice. And it sees the addressable market rise to $7 trillion to $10 trillion with this pivot.
RH stock is down 34% over the past year, and it trades for a dirt cheap valuation of only 9 times trailing-12-month earnings. Now is a great time to buy.
