Berkshire Hathaway delivered a 3,787,464% return to shareholders from 1964 through 2022, all thanks to the investing skills of CEO Warren Buffett. The Oracle of Omaha is famous for his long-term, buy-and-hold investing style. He looks at buying stocks the same as if he was buying the whole company, which has been key to his incredible investing record.
A group of Motley Fool contributors recently selected three stocks from Berkshire's holdings that could be timely buys this month. Here's why they chose Kraft Heinz (KHC 1.28%), Floor & Decor (FND 0.30%), and T-Mobile (TMUS 0.18%).
Can't go wrong investing in top grocery brands
John Ballard (Kraft Heinz): Kraft Heinz often goes overlooked among Buffett's top holdings, but it's clearly one of his favorites. At the end of 2022, it was one of Berkshire's largest holdings with the company's stake worth over $13 billion. Kraft stock has been a mainstay for Buffett in recent years. The company has been working to improve its growth profile, and its performance last year in the face of high inflation shows a bright future.
While Kraft Heinz reported a decline in overall sales volume, adjusted (organic) net sales grew 10% thanks to price increases. The company couldn't offset all inflationary costs with higher selling prices, but it still performed well, generating an operating profit of $3.6 billion on revenue of $8.7 billion.
The stock has slightly bested the S&P 500 index over the last year as investors sought more defensive stocks as the markets tanked. Investors are clearly attracted to the company's strong pricing power and brands, on top of management's position for long-term growth. On that front, management likes the momentum heading into 2023 and plans to increase investment in marketing to drive more growth.
Income investors will also like the company's dividend. Kraft is expected to pay out 55% of adjusted earnings to shareholders this year, bringing its forward yield to an attractive 4.06%. With the stock also trading at a modest forward price-to-earnings ratio of 14.5, Kraft Heinz looks undervalued and could be a great investment from these share prices.
Steady, profitable growth in a niche industry
Jennifer Saibil (Floor & Decor): It hasn't been easy to grow revenue and increase profits in a volatile, inflationary economy. But Floor & Decor has posted consistent growth throughout the past few years, building its niche business in hard-surface flooring. Most impressively, comparable store sales (comps) have been robust, a metric that has been challenging for many retailers.
Sales increased 24% year over year in 2022 to $4.3 billion, and comps increased 9%. That slowed down toward the end of the year, when comps increased only 2.5% in the fourth quarter over last year, and that's something to keep an eye on. Profitability was strong as well, with earnings per share (EPS) of $2.78, up from $2.64 last year for the full year, and that remained strong through the end of year, with EPS rising from $0.46 last year to $0.64 this year in the fourth quarter.
It won't be surprising if the stock feels near-term pressure, but what's exciting is its vast future potential. It's still a small outfit, with 191 stores as of the end of 2022, up from 160 a year before. It sees the opportunity to expand to up to 500 stores over the next eight or nine years, giving it ample room for growth even without the addition of comparable sales. But it's not relying on new stores, and it's investing in its pro business, design services, commercial customers, and digital channels.
Floor & Decor stock is already up 42% this year as savvy investors buy shares. It's not incredibly cheap at this price, trading at 36 times trailing-12-month earnings. Buffett usually looks for undervalued stocks, and that tells you something about how he views the opportunity. Floor & Decor sports a higher valuation because it's reliable for increased sales and earnings, and its growth story is very compelling.
The un-carrier
Jeremy Bowman (T-Mobile): Telecom is generally regarded as a sleepy industry popular among income investors. Both AT&T and Verizon Communications have underperformed the market in recent years and struggled to grow their businesses, but one telecom stock stands head and shoulders above them: T-Mobile.
The stock is up more than 500% over the last decade as it's steadily taken market share from AT&T and Verizon (helped by its 2020 merger with Sprint), and grown revenue and profits.
There are a number of reasons for T-Mobile's success. It's avoided the failed M&A moves that have plagued AT&T and Verizon in recent years. It got a head start in its 5G rollout; it has less debt than its two rivals, and the blunders of AT&T and Verizon have helped give it an opportunity to gain market share.
T-Mobile hasn't reported first-quarter results yet, but in the fourth quarter of 2022, it added 1.8 million total customers and 6.8 million for the year, marking the eighth straight year it's led the industry. It also achieved its lowest churn rate ever at 2.77%, showing the company is getting better at retention. Revenue in the quarter was down due to a decline in equipment sales, but the core business of phone subscriptions remains strong. Core adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 15.9% to $6.6 billion.
For 2023, the company is forecasting customer additions of 5 million to 5.5 million, and it expects core adjusted EBITDA to grow 10% to $28.7 billion-$29.2 billion.
T-Mobile does not pay a dividend, but it has been aggressively buying back stock and is reducing its debt burden. Overall, the company has demonstrated that it's a top performer in the telecom industry, and it has the 5G advantage, brand strength, and track record to retain the lead.
