When Warren Buffett purchased a controlling stake in Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) and became its CEO in 1965, the company was valued at roughly $18 per share. If you owned $1,000 worth of Berkshire stock when Buffett took over and held on to your position, it would now be worth more than $30 million.
With that incredible performance in mind, two Motley Fool contributors have teamed up to take a couple of pages out of the Oracle of Omaha's famously successful playbook. Read on for a look at two Buffett-backed stocks that they believe are worth buying right now -- one that's only down slightly from its lifetime high and another that trades at a steep discount.
Let Buffett and Co. do the work for you
Keith Noonan: Not only did Buffett's company handily outperform the S&P 500 index amid last year's brutal market volatility, but it's also outperforming in this year's market rebound. While the benchmark index is up approximately 12.5% year to date, Berkshire stock has risen 16.5%. The investment conglomerate's stock is down just 3% from its lifetime high on the heels of a recent pullback for the broader market, and shares continue to look like a smart buy for long-term investors.
Led by Buffett, co-chairman Charlie Munger, and teams of top analysts, Berkshire has done an incredible job beating the market through the years. If you want to have your money managed by time-tested investing geniuses, owning the company's stock is a great way to do it.
The company owns a stock portfolio valued at roughly $347 billion. It also holds roughly $147 billion in cash and short-term Treasury bonds. The rest of the value of the company comes from its fully and partially owned subsidiaries including GEICO, the BNSF railway business, and utilities unit Berkshire Hathaway Energy. Strong performance from its subsidiaries pushed the investment conglomerate's operating income up 6% year over year to reach roughly $10 billion in this year's second quarter, and the value of the company's stock portfolio surged in conjunction with momentum for the broader market.
While Berkshire owned 51 different stocks in its portfolio as of its last public update, its holdings are actually concentrated across a handful of dependable blue chip stocks that consistently serve up strong profits and pay dividends. Its five largest stock holdings by weight are Apple, Bank of America, American Express, Coca-Cola, and Chevron, and these positions account for roughly 73% of its total stock portfolio.
Buffett and the rest of the team at Berkshire have done a tremendous job picking winning investments through the years. If you're seeking a low-risk way to beat the market over the long term, backing the company looks like a great way to do it.
StoneCo is selling at a steep discount
Parkev Tatevosian: One of my favorite beaten-down Buffett stocks to buy right now is StoneCo (STNE 5.01%). The Latin American financial services company has demonstrated solid growth over the years, which has led to rising profitability. Moreover, the valuation is attractive due to the stock price falling 89% off its high. There is some risk with investing in stock from a region less stable than the U.S., but I believe that is more than accounted for in the stock price.
I mentioned revenue growth earlier, so let's get specific. Between 2016 and 2022, StoneCo expanded sales from $126 million to $1.72 billion. The company's expansion might slow over the next few quarters as management highlighted a focus on more profitable clients. That could ultimately prove a prudent decision. Customer selection is vital to business success. What's the use of chasing customers with little chance of adding value to your business?
Considering its rapid growth, you might think the company is not generating operating income -- but you would be wrong. StoneCo has generated positive operating income in each of the last seven years. More importantly, it has increased its operating income from $40 million in 2016 to $708 million in 2022. Given management's increased focus on profitable clients, I would not be surprised if this metric turns higher.
STNE PE Ratio (Forward 1y) data by YCharts
Fortunately for investors, the sell-off in StoneCo stock has it trading at a forward price to earnings of 10.5, a reasonable price to pay for a stock that has earned a spot in Buffett's Berkshire Hathaway portfolio, demonstrates excellent growth, and is expanding profits.
These vastly different Buffett stocks look like great buys
Berkshire Hathaway stock is a Buffett-led investment vehicle that provides a strong chance of banking market-beating returns while having a relatively low risk profile. Meanwhile, StoneCo is a deeply discounted Berkshire portfolio component that comes with a greater degree of risk but also offers potentially explosive upside. These two companies are different, but investing in both stocks could be a great way to manage risk while still leaving the door open for incredible returns.
