3 Warren Buffett Stocks That Look Like Bargains Now

Lots of investing strategies can outperform the broad market over a relatively short period of time in the same way a broken clock tells the right time twice a day. Since most of us want a long-term retirement, it makes sense to follow investors who have a proven ability to pick stocks that put up consistent gains over time.

You'd be hard-pressed to find a better stock-picking track record than Warren Buffett's. Shares of Berkshire Hathaway have gained, on average, 19.7% annually since he began running the holding company in 1965.

Fear of recession has held these three Buffett stocks down, but their underlying businesses are growing steadily. Scooping up some shares now that they look like bargains could give you a much-better-than-average chance to outperform the overall market and Buffett himself.

StoneCo

StoneCo (STNE 3.34%) is a fintech company headquartered in Brazil that helps e-commerce companies conduct business with a combination of software and financial services. Buffett and Berkshire are likely interested in the company's financial services segment, which grew its client base to 2.5 million merchants at the end of 2022, a 48% gain year over year.

Fueled by both banking and software, fourth-quarter earnings before taxes rocketed 50.2% higher year over year. Despite this rapid growth during a difficult period for the global economy, the stock is trading at just 18.9 times forward-looking earnings expectations.

At its present valuation, shares of StoneCo can outperform over time if the business creeps forward at a mid-single-digit percentage. StoneCo isn't the only e-commerce software provider small and medium-sized businesses have to choose from. As the only one that also boasts a strong financial services business in Brazil, though, continued growth at a rapid pace seems likely.

Ally Financial

The recent implosion of two mid-sized American banks caused financial stocks across the sector to tank. One that fell further than it probably should have is Ally Financial (ALLY -0.07%).

The recent failure at SVB Financial's Silicon Valley Bank happened because too many of the businesses it served tried to withdraw their uninsured deposits all at once. Ally Financial is mainly a consumer bank, and 91% of the $138.5 billion in retail deposits on its books at the end of March were Federal Deposit Insurance Corporation (FDIC) insured.

Last spring, Berkshire cranked up its Ally Financial position by purchasing more than 21 million shares. The stock has fallen around 23% since the end of that period, and now you can scoop up the shares for just 0.7 times the bank's tangible book value. At recent prices, the stock offers a juicy 4.7% dividend yield.

At its bargain bin price, Ally Financial shares can deliver huge gains as long as a recession doesn't cause a larger wave of defaults than it's prepared for. Getting caught in a pinch doesn't seem likely either. It finished Q4 with a loan-loss reserve that was more than twice its annualized rate of charge-offs.

Bank of America

While smaller banks like Ally Financial entice new borrowers with high-interest savings accounts, a giant like Bank of America (BAC 1.70%) can maintain a big deposit base by virtue of its reputation for stability.

During the first three months of 2023, total deposits declined by $20 billion to settle at $1.91 trillion. The minor loss in deposits is actually mind-blowing when you consider its basic savings accounts still offer a 0.01% annual percentage yield. SoFi recently bumped rates on savings accounts up to 4.2%, and this isn't the highest-yielding FDIC-insured savings account available.

With an ability to retain savings account deposits while offering nothing but a reputation for stability, Bank of America is in an incredibly lucrative position right now. Q1 net-interest income, the difference between rates received on outstanding loans and rates paid to fund those loans, rose 25% year over year to $14.4 billion.

At recent prices, you can buy Bank of America shares for just 0.91 times their book value. Plus, the stock offers an above-average 3.1% yield at recent prices.

While StoneCo and Ally Financial offer better potential returns, they're somewhat risky. Buying this Buffett stock now probably won't lead to eye-popping gains, but the odds of coming out ahead are extremely strong.