When Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) CEO Warren Buffett speaks, Wall Street and everyday investors pay close attention -- and there's a good reason why. Since taking the reins at Berkshire 58 years ago, the Oracle of Omaha has led his company's Class A shares to a return of 3,787,464% (as of Dec. 31, 2022). The comparable total return, including dividends, of the benchmark S&P 500 over the same time span is 24,708%. Buffett has lapped Wall Street's widely watched index 153 times.
Although Buffett isn't infallible, he does have a phenomenal track record of finding value on Wall Street. Berkshire Hathaway's existing portfolio consists of 49 securities (47 stocks and two exchange-traded funds) spanning $337.5 billion of invested assets.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But not all Buffett stocks offer the same outlook or opportunity. As we steam ahead into May, three Warren Buffett stocks stand out as screaming buys.
Bank of America
The first Buffett stock that's a phenomenal buy in May is none other than Berkshire Hathaway's second-largest holding, Bank of America (BAC 2.06%).
Bank stocks big and small have been clobbered over the past two months by two factors. The first being a crisis of confidence among select regional banks. The inability of some management teams to forecast interest rate movements led to the regulatory seizures of SVB Financial and Signature Bank, and has put the once high-flying First Republic Bank on very shaky ground.
The other headwind for banks is the growing likelihood of a U.S. recession. Bank stocks are cyclical, which means delinquencies and loan losses often rise when economic growth shifts into reverse. Even the Federal Reserve is now modeling a recession into its outlook for later this year.
Thankfully, Bank of America is a different breed of bank. While it had its issues during the Great Recession, BofA is now well-capitalized and a preferred home for deposits moving out of regional banks.
Though history has a way of rhyming on Wall Street, a U.S. recession may not doom banks this time around. The nation's central bank typically responds to recessions by lowering interest rates to encourage borrowing. But with the Fed combatting historically high inflation, there's virtually no chance of lending rates falling anytime soon.
Rapidly rising interest rates have been a boon for banks with variable-rate outstanding loans. Among money-center banks, none is more interest-sensitive than Bank of America. Since March 31, 2022, its reported net interest yield has jumped 51 basis points to 2.2%, and net interest income climbed $2.9 billion to $14.6 billion.
In addition to higher interest rates helping BofA more than any other major bank, we're seeing technology investments slowly but steadily paying off. Nearly three-quarters of all households are banking online or via mobile app. More importantly, 51% of first-quarter sales were completed digitally. Online and mobile interactions cost just a fraction of what in-person or phone-based interactions run. For BofA, we're talking steadily improved operating efficiency.
Despite near-term economic uncertainty, Bank of America looks like an absolute steal at 90% of its book value and just 8 times Wall Street's forecast earnings in 2023.
General Motors
A second Warren Buffett stock that's a screaming buy in May -- especially following its first-quarter operating results -- is auto stock General Motors (GM 1.98%).
Similar to BofA, one of the biggest headwinds facing GM is the prospect of a U.S. recession. Vehicle sales are pretty much linked at the hip to the health of the U.S. economy. Even a mild recession would be expected to shift auto sales into reverse and hurt the pricing power of manufacturers. That's bad news for the entire industry and not just General Motors.
But there are two sides to the cyclical trade. Despite recessions being inevitable, periods of expansion last considerably longer. Buying into highly cyclical and profitable businesses immediately prior to or during a recession tends to be a smart move for long-term investors. No matter what any near-term downturn throws GM's way, the company's long-term outlook is pointing notably higher.
One key reason this outlook shines brightly is because GM is spending an aggregate of $35 billion through 2025 on electric vehicle (EVs), autonomous vehicles, and batteries. General Motors anticipates launching 30 EV models globally by the end of 2025 and is targeting 1 million EVs in annual production capacity in North America by mid-decade. The company believes its EV segment will be generating a mid-single digit earnings before interest and taxes (EBIT) profit margin by 2025.
Looking a bit further out, GM anticipates doubling its annual sales by 2030 and believes it could generate $50 billion in annual revenue from Cruise, its self-driving car company.
While some skeptics have been quick to point to the coming demise of legacy auto in the wake of Tesla's success, the company's cash flow doesn't lie. Without $521 million in regulatory emission credits, Tesla would have produced an $80 million free cash outflow from its operations in the first quarter. Meanwhile, GM reported $2.23 billion in first-quarter automotive operating cash flow and increased its full-year automotive free cash flow guide by $500 million to a range of $5.5 billion to $7.5 billion.
Patient investors can be excited about GM's prospects in China, as well. EV market share in the world's top auto market is ripe for the picking. General Motors has the established brands and infrastructure necessary to become a major player in China for decades to come.
Even if economic trouble is on the horizon, General Motors at 5 times Wall Street's forecast earnings for 2023 and 2024 is sufficiently de-risked and an amazing deal.
Image source: U.S. Bank.
U.S. Bancorp
The third Warren Buffett stock that's a screaming buy in May is a company that may not be a Berkshire Hathaway holding for much longer. I'm talking about regional bank U.S. Bancorp (USB 1.48%), which is the parent of the more-familiar U.S. Bank.
It's not hard to mistake when the Oracle of Omaha or his investing lieutenants, Ted Weschler and Todd Combs, have lost interest in a company. Large holdings tend to be sold down for multiple quarters at a time, similar to what we've witnessed Berkshire do with its U.S. Bancorp stake over the past couple of quarters. There's a good chance that, when Form 13Fs are filed with the Securities and Exchange Commission by mid-May, we see all shares of U.S. Bancorp jettisoned from Berkshire's investment portfolio.
But that's not what's held U.S. Bancorp's stock down over the past two months. U.S. Bancorp has been wrapped up in the regional banking tumult. According to the company, it remains financially strong, despite seeing very modest deposit outflows of $3 billion between March 8 (when the regional banking crisis began) and March 31 (the end of the first quarter).
One of the factors that's made U.S. Bancorp such a consistent performer for decades is the company's relatively conservative operating approach. While it was easy for large banks to be lured by the higher potential returns of derivative investments in years/decades past, U.S. Bancorp has predominantly stuck to the bread-and-butter of banking: growing its loans and deposits. It's a boring approach, but it pretty consistently leads to a return on assets above 1%, which is a desired benchmark for most banks.
In addition to its "bread-and-butter" focus, there's probably not a large bank that's done a better job of encouraging digital banking than U.S. Bancorp. Looking back to the company's third-quarter results in 2022 (i.e., the last time it updated its digital engagement trends), 82% of its active customers were banking digitally and 62% of loan sales were being completed online or via mobile app. That was up 17 percentage points from the start of 2020. Few if any banks are enjoying an operating efficiency boost from digital banking quite like U.S. Bancorp.
Another reason for investors to be excited about the future is U.S. Bancorp's recently closed acquisition of Union Bank, the U.S. banking subsidiary of Mitsubishi UFJ Financial Group. Even though some analysts are questioning U.S. Bancorp's liquidity in the wake of this deal, I believe it to be a genius move that adds 1 million new customer accounts, many of which aren't interest-bearing. These low-cost depositors are providing an immediate benefit to U.S. Bancorp's net interest margin in 2023.
While the regional banking roller-coaster could be filled with near-term ups and downs, U.S. Bancorp has proved time and again that it has the right management team and a rock-solid balance sheet in place to weather the storm. With its yield above 6% and its forward-year earnings multiple now well below 7, it's the perfect time for opportunistic investors to pounce.
