For the better part of the past 58 years, Berkshire Hathaway (BRK.A 0.35%)(BRK.B 0.58%) CEO Warren Buffett has been putting on a clinic for Wall Street and investors. Although the Oracle of Omaha (as he's now known) isn't infallible, he's doubled-up the annualized total return, including dividends, of the widely followed S&P 500 since becoming CEO -- 19.8% for Berkshire Hathaway's Class A shares (BRK.A) versus 9.9% for the S&P 500.
It's important to recognize that Warren Buffett's success has nothing to do with luck. Rather, it's a combination of being patient and allowing his (and his team's) investment theses to play out, as well as being picky about valuation. In Buffett's own words, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
The Oracle of Omaha is big on buying wonderful businesses at a "fair price"
While Berkshire Hathaway's "Investing lieutenants," Ted Weschler and Todd Combs, have been known to, on occasion, go after higher-growth/pricey stocks, the Oracle of Omaha has a tendency to stick with time-tested, profitable, and demonstrably cheap businesses. Even with Berkshire's cash pile growing, Buffett will patiently wait for valuations to come into his comfort zone before pulling the trigger on an investment.
What you see below are the 10 cheapest stocks Warren Buffett owns via Berkshire Hathaway's $350 billion investment portfolio, as measured by the forward-year price-to-earnings (P/E) ratio.
- Ally Financial (ALLY +0.95%): forward P/E of 5.57
- General Motors (GM 0.69%): 5.69
- Citigroup (C +0.12%): 7.45
- Capital One Financial (COF 1.30%): 7.68
- Celanese (CE +4.32%): 7.76
- HP (HPQ 2.65%): 8.41
- Jefferies Financial (JEF 0.51%): 8.42
- Bank of America (BAC 1.49%): 8.58
- Vitesse Energy (VTS +1.33%): 8.76
- Globe Life (GL 0.10%): 9.5
Keep in mind that the forward-year P/E ratio for the S&P 500 is close to 19 at the moment. While comparing the forward P/E ratios of companies in different sectors and industries with varied growth rates isn't exactly apples-to-apples, it gives you some idea of how much cheaper these 10 holdings are relative to the broader market.
NYSE: BAC
Key Data Points
Financials appear to be a big-time bargain
The first thing that stands out about this list is that 60% of Warren Buffett's cheapest stocks are from the financial sector -- Ally Financial, Citigroup, Capital One Financial, Jefferies Financial, Bank of America, and insurer Globe Life.
Financials have been beaten down in recent months for two reasons. One is the growing expectation the U.S. will fall into a recession in the not-too-distant future. While some economic datapoints suggest a recession is unlikely, such as the historically low U.S. unemployment rate, other indicators and metrics appear to signal trouble. Examples include the cardboard box recession, clear signs of credit tightening among U.S. commercial banks, and the steepest decline in M2 money supply since the Great Depression.
The other worry weighing on financials is the now-passed regional banking crisis that saw SVB Financial's Silicon Valley Bank fail, along with Signature Bank and First Republic Bank. Lending standards have tightened in the wake of these failures, even though the last of these large-bank seizures occurred nearly two months ago.
However, being greedy when others are fearful is what Buffett does best. Thanks to one of the steepest rate-hiking cycles in history, banks and lenders like Bank of America, Capital One Financial, and Citigroup have seen a tailwind of added net-interest income. It's possible that higher lending rates could increase profits for these three companies even if the U.S. were to dip into a recession.
When analyzing bank stocks, book value tends to be a fairly important metric to focus on. Though it's not a tell-all metric, being able to buy high-quality banks below their book value has, traditionally, been a winning strategy. Bank of America trading at just 90% of its book value is the perfect example of a potential bargain in the financial sector.
The Chevy Silverado is GM's top-selling model. Image source: General Motors.
The Oracle of Omaha gravitates to well-known, brand-name businesses
Another fairly common theme with Warren Buffett's cheapest stocks is that he tends to stick with well-known businesses that have established track records.
For example, Detroit-based General Motors isn't going to knock anyone's socks off with its growth rate. But what GM does have is more than 100 years of brand power and consumer engagement under its belt.
Although all the talk these days seems to be about electric vehicles (EVs) and what Tesla is doing to change the clean-energy landscape for autos, it's General Motors that continues to generate billions of dollars in annual operating cash flow from its global lineup of internal-combustion engine (ICE) vehicles. GM has ample cash flow, deep pockets, and the infrastructure necessary to successfully shift its production from ICE vehicles to EVs in the coming years. More importantly, Tesla lacks the branding power and history GM possesses.
Personal computing (PC) and printing solutions company HP is another example of a cheap, brand-name business that's caught Buffett's eye. Even though PC and printer sales growth is rather slow, HP can be counted on for predictable cash flow year after year.
NYSE: CE
Key Data Points
Cheap stocks tend to have hearty capital-return programs
A final thing investors should note about the 10 cheapest stocks Warren Buffett owns via Berkshire Hathaway's investment portfolio is that most have rock-solid capital-return programs. Virtually all of the companies on this list are established companies that tend to reward their long-term shareholders with a combination of dividends and share buybacks.
Bank of America, which is Berkshire Hathaway's second-largest holding by market cap, is parsing out more than $7 billion annually in dividends. What's more, CEO Brian Moynihan and BofA's board typically go to bat for their shareholders and collectively return in excess of $20 billion annually via dividends and buybacks when the U.S. economy is firmly expanding.
Chemicals and specialty materials company Celanese is another steady business that has a history of rewarding its shareholders. Despite the chemicals industry being highly cyclical and dependent on a strong economy to thrive, Celanese has increased its base annual payout every year since 2010, and it's repurchased well over $3 billion worth of its common stock, in aggregate, over the past five years.
Shareholder-friendly management teams tend to be common among the stocks Warren Buffett and his team invest in.
