Legendary investor Warren Buffett is perpetually optimistic about the market, the country, and the potential for investing success. In his 2022 letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders, he reprised a view he has offered often, saying: "I have yet to see a time when it made sense to make a long-term bet against America."
However, in 2022's fourth quarter, Berkshire Hathaway didn't initiate a single new equity position. Buffett added to four of his existing positions and trimmed eight others.
That doesn't mean he has changed his tune. Buffett often talks about holding on to stocks through the inevitable ups and downs in the market. You can still envision the best long-term outcomes while astutely taking advantage of short-term market moves to find good deals, or even to sell stocks in favor of better options.
Two excellent Buffett stock holdings that look like good values today and could seriously skyrocket are Paramount Global (PARA -0.63%) and RH (RH -5.30%).
Paramount Global: the streaming underdog
Paramount looks like a relatively small player when compared on the streaming stage with Walt Disney (NYSE: DIS) and Netflix (NASDAQ: NFLX). Between the Paramount+ premium streaming channel and its ad-supported Pluto network, it has just 135 million subscribers. Compare that to Disney and Netflix, which both have around 230 million.
However, Paramount Global is a lot more than streaming. It's a veteran media company that was born from the re-merger of Viacom and CBS, and like Disney, it operates an array of media networks including CBS, Showtime, and MTV. Its 2022 revenue of $30 billion was nearly as much as Netflix's $32 billion. It has had several major hits recently, including Top Gun: Maverick, the second-highest-grossing film of 2022, and fan-favorite TV series Yellowstone. These are key to increasing revenue and populating its streaming sites.
Paramount was one of the four stock positions Berkshire Hathaway added to in the fourth quarter, and it does look like it has the Buffett appeal of being undervalued. Shares trade at less than 14 times trailing 12-month earnings -- a much cheaper valuation than Disney or Netflix.
NFLX PE Ratio data by YCharts.
At the same time, it's likely that Buffett sees a way forward as management harnesses its current opportunities. Consider that it has a lineup of stellar content and media channels similar to Disney at a much lower valuation. As a smaller player, it has more room to move up. It has a well-established, ad-supported streaming channel with a strong network of advertisers. This is what makes the stock undervalued as opposed to a value trap.
RH: creating a global brand
Upscale furniture retailer RH was growing quickly even before the pandemic, but it completely took off shortly after that crisis started. Its stock made a stunning ascent of more than 250% from the bottom of the March 2020 crash through its August 2021 peak. Since that high, though, it's down by 68%, and is now just about 10% above where it began 2020.
While revenue and income have been decreasing on a year-over-year basis, management is confident in the future -- so much so that it's in heavy launch mode, rolling out new collections, new showrooms, a new social media presence and web portal, and more.
It has a comfortable cash position, with $1.5 billion in cash and equivalents on the books as of the end of its fiscal year on Jan. 28, and $107 million in 2022 fourth-quarter net income. That provides it with the means to survive and operate despite the unfavorable economic environment.
As a premium brand, it can charge higher prices and make more full-priced sales. This contributes to wider margins and a better bottom line. Management said that its adjusted operating margin of 22% for 2022 was the best in the industry.
It's taking broad actions to maintain that image and position its business for a strong rebound. These include the acquisition of several boutique luxury brands that boost its image and exclusivity, and rolling out RH-branded luxury experiences such as a group of homes called RH Residence. It's also entering new markets with the opening of galleries in major European cities.
At the current price, RH stock trades at less than 12 times trailing 12-month earnings. While companies with declining revenue don't typically get premium valuations, this looks like a great deal for a stock that could surge when conditions become more favorable.
