Dividend growth stocks with even so-so current yields can become powerful income holdings thanks to payout hikes over time and price-upside potential.
One common trap that dividend investors can fall into is chasing stocks with high yields when they should be buying dividend growth stocks that can promise years of steady income raises.
Thanks to the magic of compounding, a dividend stock with a low yield but increasing annual payouts can deliver superior returns to a high-yield stock where the payout remains flat. A high current yield also increases the stock’s interest rate risk, says Argus Research, while an unusually lofty yield can also be a sign that the company is struggling and the dividend is in jeopardy.
“Though the income appears attractive, the share prices of high-yield stocks may be at risk,” write Argus Research’s John Eade, director of portfolio strategies, and Jim Kelleher, director of research. “Indeed, if interest rates drift higher, risk-averse equity investors could be drawn to the relative safety of bonds and may sell their high-yield stocks.”
The dividend-growth stocks that Argus Research typically likes have lower yields, often in the 1.0% to 2.5% range (with some exceptions, of course). Although the yields are not particularly high, management teams may be more likely to boost the payouts over time, as earnings grow. The objective is to find companies that are growing their dividends faster than the market average over time. Such firms are poised for outperformance, Eade and Kelleher say.
“We expect select high-quality, well-managed companies to continue to raise their dividends at aggressive (read: double-digit) rates, as part of their value proposition to investors,” the duo writes.
“Most utilities pay dividends,” says Argus Research, “but few, other than American Water Works (AWK, $152.16) raise them at a double-digit rate” – a 10% five-year average annual pace that more than makes up for its modest current yield.
Janney recently downgraded shares in American Water Works, but not because there’s anything wrong with the company. If anything, AWK stock is a victim of its own success.
“AWK shares have risen 30% this year,” Janney says. “The performance has been exceptional. The outsized move by AWK to the upside is likely reflective of what we believe has been a ‘flight to safety’ given the company’s long track of earnings performance and strong execution against strategic plans. With AWK shares now trading above our fair value estimate, we’ve reduced our rating from Buy to Neutral (Hold), based on valuation.”
The elevated share price has prompted some Wall Street pros to moderate their bullishness on the name. And so new investors might want to wait for a better entry point.
However, AWK still has plenty of fans. Of the 16 analysts covering the stock tracked by S&P Global Market Intelligence, five call it a Strong Buy, two say Buy and seven rate it at Hold. One analyst says Sell and one rates it at Strong Sell. Collectively, their average recommendation of 2.44 equates to a consensus Buy rating.
Some stocks are great for dividend growth and earnings growth. Take Apple (AAPL, $115.32), for instance.
Argus Research applauds the iPhone maker for being a member of the “technology dividend parade,” noting that it has a five-year dividend growth rate of 10%.
And at the same time, analysts, including Argus Research, estimate that Apple’s earnings will grow at an average rate of more than 11% over the next three to five years. That’s remarkable for a company with a market value that regularly dabbles with $2 trillion.
The release of the new iPhone 12 is expected to prompt users to upgrade their iPhones like never before.
“With our estimation that 350 million of 950 million iPhones worldwide are currently in the window of an upgrade opportunity, we believe this will translate into an unprecedented upgrade cycle for Apple,” writes Wedbush, which rates AAPL at Outperform (Buy).
Apple last increased its dividend with the May payment, raising it by 6.5%, and its legendary cash position gives it ample room to keep the raises coming.
Clorox (CLX, $208.73) is a new addition to the Argus Dividend Growth Portfolio, and it fits right in. Argus notes that the cleaning-products maker has hiked its payout for 42 consecutive years.
Although there’s little doubt that Clorox has a superior track record of dividend growth, a major rally in the share price has a number of analysts moving to the sidelines. CLX is up about 40% for the year-to-date, boosted by pandemic demand, and that has made the stock too pricey for some investors.
Indeed, shares change hands at 28 times next year’s earnings, while analysts expect those earnings to increase at an average annual rate of less than 5% over the next half-decade.
Of the 15 analysts covering the stock tracked by S&P Global Market Intelligence, three rate it at Strong Buy, eight say Hold, two call it a Sell and two have it at Strong Sell.
New investors might want to wait for a better entry point, but there’s no question they’re getting as solid a dividend payer as they come. Clorox has increased its payout every year since 1977, most recently in May 2020 when it climbed 5% to $1.11 per share. The five-year dividend growth rate stands at 10%.
Microsoft (MSFT, $204.72) has been such a runaway winner when it comes to share-price performance, it’s easy to overlook what it has done for income investors. But Argus Research has been paying attention, noting that the software giant has grown its dividend without interruption in each of the past 16 years.
Even better, MSFT has more than enough financial wherewithal to keep the increases coming. Apple might get all the attention for having epic levels of cash on its books, but Microsoft is far from a slouch. The company generated more than $30 billion in free cash flow after paying interest on debt in each of the past two years. MSFT also has $138 billion in cash and cash equivalents.
Most of the Street is in thrall of the company’s execution and profit prospects. Analysts expect Microsoft to generate average annual earnings growth of almost 13% for the next three to five years.
Their consensus call on the name is a rare Strong Buy.
Costco (COST, $364.86) isn’t going to blow anyone away with its dividend, but Argus Research urges investors to look at the broader income picture.
“This yield for this retail company may be low at 0.9% – but management’s five-year track record of dividend growth is 12% and average annual returns over the past five years have been 21%,” Argus’s analysts write.
Keep in mind that over the past five years, after including dividends, COST generated a total return of 158%. Excluding dividends, the stock would have delivered a gain of just 133%. Sure, the yield might seem paltry, but over the past half-decade it contributed 25 percentage points to investors’ returns. Management last raised the dividend in April, by 7.7% to 70 cents a share.
Bullish analysts also point to the fact that although shares are not cheap, they’re hardly fully valued either.
“Although long-term uncertainties, such as renewal rates from the recent membership fee price increase and the threat from Amazon, remain watchpoints, we maintain our Buy rating as we believe current valuation provides modest downside protection,” write Stifel analysts.
The Street sees Costco generating average annual earnings growth of almost 10% over the next three to five years. With 14 Strong Buy calls, seven Buys, 10 Hold rating and two Sells, analysts’ average recommendation comes to Buy.
Kroger (KR, $32.26) is a safe and solid dividend growth stock, says Argus Research.
“The 2.1% yield for this consumer staple company is in the sweet spot for the portfolio; management has increased the annual payout for 11 consecutive years,” Argus notes.
And if you need a seal of approval, consider that the nation’s largest supermarket operator has a fairly new fan in Warren Buffett, who is a well-known devotee of dividends.
The Berkshire Hathaway (BRK.B) CEO first invested in KR in the fourth quarter of 2019 and has since raised its stake. The holding company is now Kroger’s sixth-largest shareholder with 21.9 million shares, or 2.8% of its shares outstanding.
With an 11-year track record of uninterrupted payout hikes and a dividend growth rate of 12%, it’s plain to see why income investors are drawn to this name. The bottom line is set for solid profit growth, too.
Analysts note that Kroger is benefitting from more people eating at home, and that it isn’t getting enough credit for its bustling online business.
“We continue to believe KR’s shares are undervalued and think the market is underestimating KR’s potential in e-commerce,” says CFRA, which rates the stock at Buy. “KR’s e-commerce platform is already stronger than its closest peer and should get even stronger next year.”
Abbott Laboratories (ABT, $105.00) develops and manufactures branded generic drugs, medical devices, nutrition and diagnostic products. Its portfolio of wares includes the likes of Similac infant formulas, Glucerna diabetes management products and i-Stat diagnostics devices.
“This healthcare company’s yield of 1.5% is in the sweet spot for the portfolio,” says Argus Research. But perhaps the most powerful draw of this name is its legendary track record of dividend growth. ABT’s management has increased the annual payout for 48 consecutive years, and its five-year dividend growth rate stands at 13%.
To say management is devoted to returning cash to shareholders is an understatement. Abbott Labs first paid a dividend in 1924. Its last payout hike came in December – a 12.5% improvement to 36 cents per share.
Argus isn’t alone in its affection for the company. A total of 12 analysts rate the stock at Strong Buy and four say Buy. Three analysts call it a Hold and two say Sell.
Sherwin-Williams (SHW, $692.09) is a new addition to the Argus Dividend Growth portfolio. The fact that it has increased its dividend for 42 consecutive years no doubt plays a part in that decision.
SHW, which acquired Valspar for $11 billion three years ago, is one of the largest paints, coatings and home-improvement companies in the world. The company’s scale is one reason why Baird Equity Research rates the stock at Outperform. The firm notes that SHW is benefitting from the rise of the do-it-yourself movement amid the pandemic, as well as macroeconomic strength.
“Sherwin-Williams has clearly benefited from the improvement in U.S. housing fundamentals over the last five years,” Baird’s analysts say. “Sherwin should continue to outpace market growth by 1.5-2x based on their outsized exposure to professional painting contractors.”
Income investors certainly don’t need to worry about Sherwin-Williams’ steady and rising dividend stream. SHW has hiked its distribution every year since 1979, including a nearly 19% jump in February 2020, and it pays out a mere 27% of its earnings as dividends.
The pros forecast Illinois Tool Works to generate solid profit growth in the years ahead. Indeed, they’re expecting annual earnings growth of 11% over the next three to five years. Nevertheless, it looks pricey for most investors, trading at 26.5 next year’s earnings.
Valuation is partly why analysts’ average recommendation stands at Hold. They’re also concerned about global economic growth.
“ITW should be a core holding in any industrial portfolio,” writes Stifel (Hold). “At this time we view ITW shares as fully valued given the uncertain macro environment and its effect on the global industrial economy.”
Pharmaceutical company AbbVie (ABBV, $80.67) was spun off from Abbott Laboratories in 2013. Like its parent, it carries a longstanding dividend-growth streak. What’s perhaps even better is that ABBV has some blockbuster drugs on its hands.
Including its time as part of Abbott, AbbVie upped its annual distribution for 49 consecutive years, with the most recent hike announced at the end of October. ABBV said it approved a 2021 dividend increase of 10.2%, beginning with dividend payable in February.
Argus Research notes that the firm has raised the dividend at an average 20% rate over the past five years (prior to this increase). And with a yield well above 6%, based on the new payout, ABBV certainly stands out as an exception to Argus’ low-yield preferences.
Two of AbbVie’s best-selling products include Humira, a rheumatoid arthritis drug that has been approved for numerous other ailments, and cancer drug Imbruvica. Humira is on pace to surpass Lipitor as the best-selling drug of all time.
* Yield based on the recently announced dividend increase.
Home Depot (HD, $269.63) recently boosted its payout by “only” 10% in February, Argus Research notes, but don’t let that distract you from the fact that the retailer has a long-term dividend growth rate of 22%.
The nation’s largest home improvement chain is one of the few businesses to benefit from the pandemic forcing folks to stick close to home. And it’s making the most of it.
“The evidence is pretty clear, people are eating at home, playing at home, and ordering things from home, and because ‘home’ is so important, Americans are investing in their homes and yards,” says Argus. “Sheltering-at-home has given consumers the time and inclination to take on small home improvement projects. HD is a potential beneficiary if consumers reallocate a portion of their spending from traveling and eating out to working, relaxing and studying in a safe comfortable home and yard.”
The broader analyst community is likewise bullish on HD, a component of the Dow Jones Industrial Average. Their average recommendation stands at Buy, according to S&P Global Market Research, with a long-term growth forecast of 8.1%.
When it comes to Wall Street’s favorite dividend stocks, the pros are all about energy companies and utilities these days.
Whether it’s an increase in residential energy needs or a nascent recovery in commodity prices, analysts’ most highly rated dividend stocks – firms such as oil and gas drillers, electric utilities, pipeline companies, oilfield services and other sector names – find themselves heavily over-represented.
To find analysts’ favorite dividend stocks, we scoured the S&P 500 for dividend stocks with yields of more than 3%, excluding a number of extremely high yielders because of excessive risk. (Sometimes, a too-high yield can be a warning sign that a stock is in deep trouble.)
From that pool, we focused on stocks with an average broker recommendation of Buy or better. S&P Global Market Intelligence surveys analysts’ stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call.
Lastly, we dug into research and analysts’ estimates on the top-scoring names.
That led us to these top 25 dividend stocks, by virtue of their high analyst ratings and bullish outlooks. Read on as we analyze what makes each one stand out.
The coronavirus crisis has hurt commercial and industrial demand for energy, but it has also boosted residential demand. That bodes well for Exelon (EXC, $40.98), a utility that generates electricity from nuclear, fossil, wind, hydroelectric, biomass and solar generating plants.
And with bonds bearing paltry yields, utility stocks such as Exelon have become more attractive for cautious income investors.
“Exelon is one of a few utilities that we think can serve as a core holding in a diversified portfolio, based on the company’s positive results and guidance outperformance,” says Argus Research (Buy), which covers a large number of energy stocks. “The current yield … is above the average for electric utility stocks. We see the defensive characteristics of utilities such as Exelon as particularly attractive during periods of low interest rates.”
Of the 19 analysts covering the dividend stock who are tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, seven say Buy, three have it at Hold and one says Sell. They also see decent growth ahead. The pros’ average price target of $46 per share gives EXC implied upside of about 12% over the next 12 months or so.
The lone energy play among the 30 Dow stocks is getting bigger – much bigger. In early October, Chevron (CVX, $73.40), one of the highest-yielding dividend stocks on this list, completed its acquisition of Noble Energy, which had a market value of more than $4 billion as a publicly traded company.
UBS applauded the deal, calling it a “bolt-on at an extremely attractive price” and noting that few firms but CVX could have pulled it off.
“Chevron’s strong financial status placed it rather uniquely in the context of its peers that would ordinarily all be looking for acquisition opportunities at the bottom of the cycle (although some may now be more focused in the renewables space),” said UBS, which rates shares at Hold.
UBS isn’t in the majority with its rating, however. Eight of the 25 analysts covering the stock tracked by S&P Global Market Intelligence call CVX a Hold, but 10 rate it a Strong Buy, and another six say Buy. Meanwhile, just one says it’s a Sell.
It’s also worth noting that while Chevron is struggling this year because of COVID’s hit on oil prices, CVX was able to generate free cash flow (after paying interest on debt) of about $13 billion for two consecutive years.
CFRA calls regional bank Fifth Third Bancorp (FITB, $23.12) a coronavirus recovery play.
“The 15th largest bank in the U.S. by assets, FITB maintains a strong presence in Midwest U.S and continues to gain market share through its strategy to grow middle-market commercial lending, deepen industry verticals, and expand further into the faster-growing Southeast,” says CFRA, which calls FITB shares a Buy.
CFRA’s bullish stance is supported in part by the bank’s “attractive valuation and a high dividend yield.” Its analysts expect the lender to benefit from declining credit headwinds as the U.S. economy recovers from the Covid-19 shock.
“As local economies fully reopen and the economic landscape shows stability, improved fundamentals should drastically reduce credit costs associated with FITB’s loan portfolio with sizable exposure to commercial real estate,” CFRA adds.
Fifth Third is generous as far as dividend stocks go, yielding nearly 5% at present. Analysts expect FITB to generate average annual earnings growth of 9.3% over the next three to five years, according to S&P Global Market Intelligence. They’re also largely bullish, with 10 Strong Buys and six Buys versus six Holds and just one Strong Sell.
Sempra Energy (SRE, $126.55) is another energy stock that should benefit from current industry trends. The electric and natural gas infrastructure company is expected to hold up better during the pandemic than stocks in discretionary sectors, says Argus Research.
“We expect higher residential electricity usage from increased working and learning at home to boost kilowatt-hour sales at Sempra and other utilities,” say Argus’s analysts, who rate shares at Buy. “We also expect Sempra to benefit from rising commercial and industrial kWh demand as businesses reopen in its Southern California service territory.”
Investors in dividend stocks will be happy to know that over the past five years, Sempra has raised its dividend at a compound annual rate of 6.7%. Argus Research’s dividend estimates are $4.20 for 2020 and $4.38 for 2021.
Lastly, Sempra has a pretty attractive long-term growth rate for a utility. Analysts on average forecast earnings growth of 7.3% annually for the next three to five years, according to S&P Global Market Intelligence.
Truist Financial (TFC, $42.60), a regional lender and the sixth-largest U.S. bank by assets, is popular with Wall Street analysts. TFC gets 10 Strong Buy ratings, six Buy ratings and eight Hold calls from the 24 analysts covering the stock.
Truist was formed in December 2019 by the merger of regional banks BB&T and SunTrust Banks – a deal that should serve it well once the pandemic has run its course, analysts say.
“The rationale for Truist – scale, scope and the capacity to invest – has been made even more clear by all that’s transpired,” says Credit Suisse, which rates the stock at Neutral (equivalent of Hold). “Scale is incrementally more important as is scope, i.e., a complete product set plus diversification, and the capacity to service customers however they choose.”
On a positive note, Truist is seeing some loan growth and deposit flows remain “solid and sticky,” says Credit Suisse. The broader analyst community forecasts the bank to deliver average annual earnings growth of 5% over the next three to five years.
Citizens Financial (CFG, $28.02), another regional lender, gets a thumbs-up from most of the analysts on the Street.
“We generally favor regionals over money centers,” says UBS, which rates the stock at Buy. “Ultimately, leverage to falling loan loss reserves, self-help opportunities and valuation discounts underlie our preferences. Citizens Financial and Fifth Third Bancorp are our top picks.”
Of the analysts covering CFG, nine call it a Strong Buy, seven have it at Buy, four says it’s a Hold and one rates it at Strong Sell.
Citizens looks like one of the most generous dividend stocks on this list. The bank has raised its quarterly payout every year over the past half-decade, most recently to 39 cents a share. That represents an improvement of 290% over the 10 cents a share it paid in 2016.
But CFG is more than a dividend growth play – analysts’ average price target of $30.93 gives the stock implied upside of about 10% over the next year or so.
Real estate investment trusts (REITs) are having a rough 2020, and Boston Properties (BXP, $79.76) is having an even tougher time than most.
Shares in the owner and developer of top-shelf office properties have tumbled 40% so far this year. That compares unfavorably to the REIT sector of the S&P 500, which is down about 5%.
But analysts think the selloff has made Boston Properties’ stock attractive on a valuation basis, and applaud the quality of its real estate portfolio and development pipeline. Such strengths should help BXP outperform when the pandemic is largely behind us.
“While the coronavirus has decreased the demand for office space, we think the gradual reopening of the economy will benefit BXP over time,” says Argus Research, which rates the stock at Buy. “The company’s $2.8 billion development pipeline is focused on coastal markets mostly outside New York City. We see this as a competitive advantage relative to peers whose rents are being pressured by rising supply.”
Of the 21 analysts covering the stock tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy, three say Buy and eight have it at Hold. Their average target price of $106.52 gives BXP implied upside of 33% over the next 12 months or so. That doesn’t even include the 5% in yield you’d be collecting along the way.
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Market value: $21.3 billion
Dividend yield: 3.5%
Analysts’ average rating: 1.89 Entergy (ETR, $106.48) is yet another electricity utility that the Street likes for income and defense. Of the analysts covering the stock, eight say it’s a Strong Buy, four say Buy and six have it at Hold.
UBS analysts are in the Buy camp, and note that ETR expects to align its dividend growth rate with its earnings per share (EPS) growth rate in the third quarter of 2021. UBS expects the utility’s EPS to increase at an annual rate of 5% to 7% from now through 2024.
That growth forecast is in line with the Street’s consensus view. A survey of all 18 analysts covering Entergy expect the firm to generate average annual earnings growth of 6%.
Wall Street’s pros think dividend stocks in the beaten-down oil and gas exploration and production industry are a good place to hunt for bargains, and they’ve alighted on EOG Resources (EOG, $38.64) as one of their favorite picks.
If nothing else, EOG certainly is beaten down. Shares have lost 54% for the year-to-date, which is about par for the sector, and represents painful underperformance vs. the broader market, which is up almost 9%.
CFRA notes that part of the selloff is due to the fact that EOG holds many drilling permits on a wide swath of federal land. Joe Biden’s energy plan calls for sunsetting federal drilling permits should he become the next president of the U.S.
“Overall, we think EOG is being unreasonably penalized,” says CFRA, which rates the stock at Buy. “EOG is being adversely affected by its high 25% share of acreage on federal land. Upon further reflection though, we think investors are not giving its overall portfolio enough credit.”
CFRA adds that there are reasons to be skeptical of oil and gas producers in a world that remains under pressure from COVID-19, “but we view EOG as a best-of-breed producer.”
The majority of Wall Street’s experts are in the same bull camp. Fifteen analysis rate the stock at Strong Buy, seven say Buy and 11 call it a Hold, according to S&P Global Market Intelligence.
AbbVie (ABBV, $86.65), the first health care stock on our list, should be very familiar to long-term dividend investors. That’s because the pharmaceutical company is a Dividend Aristocrat, by virtue of having raised its dividend for 48 consecutive years. Even better, Argus Research, which rates the stock at Buy, notes that ABBV has hiked its dividend at a 20% rate over the past five years.
On a more bearish note, CFRA says AbbVie’s future sales could be at risk if a new administration tackles drug-price reform. Two of the company’s best-selling drugs – Humira and Imbruvica – account for 55% of ABBV’s 2020 sales, and they’re boosted by Part D Medicare spending.
“As a result, we think ABBV’s drug price reform risk is high relative to peers,” says CFRA, which rates the stock at Hold.
Most analysts remain optimistic about ABBV despite the risk from drug-price reform. Of the 19 analysts covering the stock tracked by S&P Global Market Intelligence, nine call it a Strong Buy, four say Buy and six rate it at Hold.
NiSource (NI, $23.11), a natural gas and electricity utility, finds itself among analysts’ favorite dividend stocks.
NiSource is the third-largest U.S. gas distribution utility and the fourth-largest gas pipeline company, and provides electric utility services in Northern Indiana. The company has pledged to retire all of its coal-fired electric generation plants by 2028. One concern analysts have, however, is how that pledge could change with Joe Biden in the White House.
“We also acknowledge the commitment to clean energy is a good first step,” says CFRA, which rates the stock at Hold. “Still, if Biden is elected, NI could potentially see a requirement to retire its coal faster-than-expected, ultimately limiting the cash flow it currently expects to extract from those plants.”
Regardless, the majority of the Street is bullish on the name. Six analysts rate NI shares at Strong Buy, five say Buy and three call them a Hold. The pros expect the utility to generate average annual earnings growth of 5.7% for the next three to five years.
As a pharmacy chain, pharmacy benefits manager and health insurance company CVS Health (CVS, $59.12) has a unique profile in the health care sector. It’s also getting a boost on the top and bottom lines from the COVID-19 outbreak.
Not that the market has noticed. Shares in CVS are off about 20% for the year-to-date. Indeed, shares are languishing so far behind its growth prospects, CVS now trades at less than 8 times 2021 earnings, making it one of the lowest-priced dividend stocks on this list.
“CVS appears to be deeply discounted and undervalued, in our opinion, as it is trading at only 7.8 times our 2021 earnings-per-share estimate,” says CFRA, which rates shares at Buy. “We believe that confusion about business dynamics across the company’s three major businesses during the pandemic has limited investor interest in the name.”
Investors looking for income equities should just note that while CVS has a strong payment history, it ended its 14-year streak of dividend hikes in 2018. The company kept its payout level, choosing instead to divert cash toward paying off its debt, which ballooned when it assumed $8 billion of Aetna’s debt after it acquired the insurer in 2018.
But you’re getting a stronger balance sheet as a result. Analysts write that CVS Health has paid down $8 billion since the close of the Aetna transaction, and it plans to pay down another $3.8 billion in debt this year.
Devon Energy (DVN, $9.50) is popular with the Street thanks in part to a recent $2.7 billion deal in which the oil and gas exploration and production company will merge with rival WPX Energy.
“The combined company will be a leading U.S. unconventional oil producer, with a premium acreage position in the Delaware Basin,” says Argus Research, which rates DVN at Buy. “We expect Devon to emerge from the current downturn as a stronger company and to take advantage of its high-quality portfolio when commodity prices recover.”
Bullish analysts outnumber those sitting on the fence 3-to-1. And no analysts are bearish. Of the 28 analysts covering DVN tracked by S&P Global Market Intelligence, 14 rate it at Strong Buy seven say Buy and seven call it a Hold. There are no sell recommendations on shares.
Analysts expect the energy company to deliver average annual earnings growth of 7.5% for the next three to five years. Their average price target of $16.49 gives DVN huge implied upside of 73% in just the next year.
Marathon Petroleum (MPC, $29.38), which refines, markets, transports and retails petroleum products in the U.S., has seen its shares lose a little more than half their value in 2020.
But analysts are beating the drum telling their clients to buy low.
Seven of the 26 analysts covering MPC tracked by S&P Global Market Intelligence rate the stock at Strong Buy, while six have it at Buy. Three call it a Hold and no analysts have MPC at Sell.
Analysts at Cowen, who rate the stock at Outperform (Buy), say the market is underappreciating MPC’s capitalization improvement after the $21 billion sale of its Speedway convenience-store chain.
“We see additional upside not contemplated in our $43 price target and independent of improving refining margins or crude differentials,” says Cowen. “This includes restructuring opportunities that could be particularly attractive if the long-term margin outlooks dims and a potential cost-cutting program to bring (operating expenses) more in-line with peers.”
Analysts’ average price target of $47.20 implies that they see MPC running 60% higher over the next 12 months or so.
Edison International (EIX, $56.28), which generates electricity for 5 million customers in California, is another utility that analysts like for defense and generous dividends.
The first glaring risk that comes to investors’ minds with this name is the impact of California’s seemingly relentless wildfires and other natural disasters. But analysts say public and policy support ensure that the risk is adequately reflected in the company’s stock price.
“Although wildfire season is unpredictable, the state fund and liability reform has helped,” notes UBS, which calls the stock a Buy.
Eight of the 15 analysts covering the stock tracked by S&P Global Market Intelligence call EIX a Strong Buy, while three more say Buy. Four have it at Hold and no one says to sell the stock.
Collectively, the pros expect DVN to deliver average annual earnings growth of 5% over the next three to five years. Meanwhile, they estimate about 18% upside over the next 12 months, based on their 12-month price target of $56.28.
Federal regulators recently hit Citigroup (C, $43.68) with a $400 million penalty for “longstanding deficiencies” related to the bank’s internal controls and risk management practices – and that’s actually good news, analysts say.
Piper Sandler, which rates the stock at Overweight (Buy), says the resolution of the federal action could be a positive catalyst for C’s share price.
“While it may seem odd to think of regulatory consent orders as a potential positive, the removal of related fear and uncertainty may provide some relief,” says Piper Sandler. “The imposed limitations and penalties seem quite manageable to us and are meaningfully less severe than implied the decline in C’s share price since press reports of the consent orders surfaced back on 09/14/20.”
More recently, Citigroup just reported better-than-expected third-quarter earnings. “Credit costs have stabilized; deposits continued to increase,” CEO Michael Corbat said in the earnings release.
The Street remains bullish on the nation’s fourth-largest bank by assets. Of 25 analysts covering the stock tracked by S&P Global Market Intelligence, 12 call it a Strong Buy, eight have it at Buy and five say Hold.
If Citigroup hits the analysts’ target for average annual earnings growth over the next three to five years, it’d be expanding at a respectable 7.9% clip.
Equity income investors have always looked to Coca-Cola (KO, $50.22) as a fount of dividends. The Dow stock has increased its payout every year for 58 consecutive years. And with interest rated plumbing the depths, analysts say the fizzy drinks maker looks like a good bet for income and stability in a rocky market.
In the shorter term, KO stock will be attuned to recovery from the pandemic, as lockdowns hurt its sales to restaurants, bars, cafeterias, sports venues and other public gathering places. Argus Research says KO, more than most, can bounce back from these setbacks.
“We believe that earnings probably bottomed in 2Q20 and should begin to improve as economies reopen,” says Argus Research, which calls the stock a Buy. “Reflecting its financial strength, the company was able to issue $5 billion of new bonds amid the crisis, highlighting investor confidence in the company’s long-term prospects.”
The 21 analysts covering KO are mostly bulls – 10 rate it at Strong Buy, with another seven saying Buy. The remaining pros say Coca-Cola is merely a Hold.
As far as future earnings go, Wall Street wants to see average annual profit growth of 5.2% over the next three to five years. And their consensus target price of $54.43 gives the stock implied upside of about 8% over the next year.
Companies like Valero Energy (VLO, $41.43), which manufactures gasoline, diesel, ethanol and petrochemical products, are looking at net losses amid low oil prices and a sluggish global economy. But those that are best able to survive now and thrive later are the Street’s favorites.
“We believe that a company’s balance sheet strength and place on the cost curve are critical, and favor those refining and marketing companies that are well positioned to manage a potentially long period of low oil prices,” says Argus Research, which calls the stock a Buy. “We believe that VLO is one of these companies as it benefits from its size, scale, and diversified business portfolio, which includes refining, midstream, chemicals, and marketing and specialty operations.”
This year won’t be pretty; Wall Street is modeling an adjusted net loss of $2.74 per share this year. The good news is VLO is forecast to swing back to profitability with earnings per share of $2.73 in 2021. Next year’s revenues are expected to rebound by 28% to $81.6 billion, too.
For all its problems, VLO is popular among the pros. Ten of the 21 analysts covering Valero call it a Strong Buy, and nine say Buy. The remaining pair are split between Hold and Sell. As a group, they expect modest average annual profit growth of 5% over the next three to five years.
Oil-field services companies have been slammed by low prices for crude oil, but some look poised for outperformance once the upturn begins.
Driller Baker Hughes (BKR, $12.86) is one such company, analysts say.
“Baker Hughes is one of our favorite names and a member of the Stifel Select List,” say Stifel analysts, who rate the stock at Buy. “It remains a favorite name due to its diverse portfolio, solid backlog, global footprint, exposure to energy transition, and its healthy balance sheet.”
They continue to say that Baker Hughes dominates the liquid natural gas equipment market, and add that cost-cutting, improved efficiency and a likely improving market should bolster oilfield service results in 2022, if not sooner.
Stifel isn’t alone in laying out the bull case. Fifteen analysts call BKR a Strong Buy, nine say Buy and five have it at Hold. Collectively, they expect the company to deliver 8.3% average annual earnings growth over the next three to five years.
Better still, their average 12-month price target sits at $20.66 – a 60%-plus surge from current prices.
Argus Research, which covers a large number of energy stocks, makes a Buy case for Phillips 66 (PSX, $51.27) that’s similar to its bullishness on Valero.
To sum it up: Only the strong might survive this era of low oil prices.
“PSX benefits from its size, scale, and diversified business portfolio, which includes refining, midstream, chemicals, and marketing and specialty operations,” say Argus analysts. “This diversification has proven valuable in different commodity price environments, and, despite fluctuating refining margins, we believe the company’s cash flow is less volatile than that of most pure-play refiners.”
Most importantly for dividend investors, Argus Research notes that PSX also has a long history of returning excess cash to shareholders in the form of cash distributions and share buybacks.
Earnings projections for the next three to five years are modest, at about 4.5% annual growth. Still, this is a strongly bullish camp – eight Strong Buys, 11 Buys and one Hold – that expects 53% upside, as implied by their average $78.65 price target.
Investors looking for growth shouldn’t ignore Broadcom (AVGO, $381.46) these days. It’s among the best semiconductor stocks on offer right now, and analysts expect the chipmaker to generate average annual earnings growth of 10.8% over the next three to five years.
But Broadcom is more than growth: It also sports a healthy dividend yield of more than 3%. That combination of price appreciation and income has made a lot of fans on the Street. Indeed, 19 analysts rate shares at Strong Buy and eight say Buy, five have it at Hold and a single analyst calls it a Sell.
Part of the optimism on AVGO stems from its position as a supplier for Apple (AAPL) and its wildly popular iPhone. Demand for Broadcom’s chips should get a tailwind as the iPhone and other smartphones are upgraded to run to 5G networks.
Also boosting the bull case is the fact that AVGO isn’t a one-trick pony. It also supplies software and devices used in applications such as center networking, home connectivity, set-top boxes, and more. That diversity should serve the company well, analysts say.
“We expect work-from-home tailwinds and AVGO’s next-generation product launches (Tomahawk, Trident, Jericho, ASICs, etc.) to drive sustained demand from cloud and telecom customers within its networking business (which is approximately 25% of AVGO revenue), says Deutsche Bank, which rates the stock at Buy.
If it isn’t clear by now, the Street currently loves dividend stocks from the energy sector. And ConocoPhillips (COP, $34.88), an oil and gas exploration and production company, gets some of Street’s highest praise.
COP suspended its share repurchase program in April as the global economy ground to a halt because of COVID-19. However, UBS, which rates COP at Buy, notes that the company has restarted buybacks, which is a very good sign.
“The re-initiation of the buyback highlights the confidence of management and its balance sheet strength,” UBS says. “The buyback is expected to be funded with the cash on the balance sheet, with pace and level being at the discretion of management.”
Of the 27 analysts covering the stock tracked by S&P Global Market Intelligence, 15 say it’s a Strong Buy, nine say Buy and three have it at Hold. They also see a big year ahead of COP – a $49.52 average price target implies more than 40% upside from here.
Not all utility stocks were safe havens during the market crash. NRG Energy (NRG, $33.21) was among the laggards and remains down by 16% in 2020.
But NRG nonetheless is popular among the analyst crowd. The electric company gets six Strong Buy recommendations, one Buy and two Holds, according to S&P Global Market Intelligence. And they see about 30% upside over the next 12 months, which is epic by utility standards.
UBS, which rates shares at Buy, looks favorably on a deal struck in July whereby NRG will acquire Canadian utility Centrica’s retail U.S. energy business for $3.6 billion. The analysts add that NRG is targeting annual dividend growth of 7% to 9%.
Wall Street expects next year’s adjusted earnings to grow 8.8% and 10.7% in 2022. That’s not a bad growth rate for a utility, a sector that is known for being poky. With shares trading at just 6.3 times 2022 earnings, NRG does look like a bargain.
The Williams Companies (WMB, $19.42), which operates interstate gas pipelines, is another energy infrastructure stock analyst expect to rally as the energy market slowly recovers.
“Energy investors want free cash flow, after dividends and capital expenditures, but with a balance sheet that is already in good shape or quickly getting there,” says U.S. Capital Advisors as part of its Buy call on WMB.
More cautiously, Argus Research rates the stock at Hold, citing an uptick in gas supplies.
“Meaningful increases in natural gas capacity would continue to pressure gas prices,” Argus says. “We continue to believe that natural gas will displace coal as a cleaner source of energy, but need to see more evidence that natural gas inventories are being worked off.”
The great majority of analysts, however, remain solidly bullish on the name. Of the 24 analysts covering the stock tracked by S&P Global Market Intelligence, 14 rate it at Strong Buy, seven say Buy and three have it at Hold.
Williams also offers a 1-2 punch, if analysts’ price targets are … well, on target. They’re spying $24.65 per share within the next year, which implies 27% upside. Add in the 8.2% yield, which is tops among these 25 dividend stocks, and the potential total return sits around 35%.
Diamondback Energy (FANG, $30.41) currently sits atop this list of the analysts’ favorite generous dividend stocks. Of the 34 analysts covering FANG tracked by S&P Global Market Intelligence, 21 have it at Strong Buy and nine call it a Buy. Only four analysts rate it at Hold and no one has it at Sell.
Diamondback Energy is a “unicorn in the oil patch” because it offers growth and defensive characteristics, say Stifel analysts, who rate the stock at Buy. “We believe the stock’s relatively low cost of supply, balance sheet and minerals ownership are a few of the reasons the company is well-positioned.”
Credit Suisse, also with a Buy call, says FANG is one of its top picks in the oil exploration and production industry. Helpfully, FANG has no exposure to federal lands, notes CFRA (also Buy), which makes the sunsetting of permits immaterial for the firm.
Seaport Global says FANG is a Buy based on its operational excellence with breadth across “the most compelling parts” of the southwest’s Permian Basin.
The pros’ long-term growth forecast is particularly bullish, with average annual earnings growth pegged at 13.5% over the next three to five years. At the same time, FANG trades at an inexpensive 9.6 times next year’s earnings and just 6.2 times 2022 earnings.
And an average target price of $58.96 means analysts expect Diamondback’s stock will shoot well more than 90% higher over the next year.
The “smart money” understands the value of scale, stability and dividends. That’s why it should be no surprise that several Dow stocks are popular among the billionaire set.
Income investors who like the security provided by blue-chip stocks can look to the Dow Jones Industrial Average for ideas.
Indeed, among the 30 Dow stocks, only three – newcomer Salesforce.com (CRM), Disney (DIS) and Boeing (BA) – don’t pay a dividend.
Massive market value, battleship balance sheets and income you can count on aren’t just appealing to retail investors and retirees. Billionaires are big fans of those attributes, too.
To get a sense of how billionaire dividend investors view the bluest of blue chips, we sussed out Dow dividend stocks that fall among the big money’s top stock picks. In every case, these stocks have the imprimatur of a billionaire, billionaire hedge fund or billionaire advisory practice. Most of these names saw a billionaire either initiate a stake recently or add to an extant position.
Have a look at the eight Dow stocks that billionaires love.
GQG Partners (AUM $30.3 billion), a large advisory firm based in Ft. Lauderdale, Florida, likes to maintain a concentrated portfolio. Really concentrated. In fact, its top 10 holdings account for more than half of its equity assets.
The firm made a big bet on Procter & Gamble (PG, $139.39) during the second quarter of 2020, initiating a 4.9 million-share stake worth $588.9 million. The Dow stock now takes up 2.6% of the advisory firm’s equity portfolio.
The pandemic has been helpful to consumer staples stocks such as PG. Shares are up almost 12% for the year-to-date, outpacing the S&P 500 by more than 6 percentage points. The reliable dividend, which currently yields 2.3%, is another positive attribute of this stock. We also like that the analyst community is bullish on P&G, with an average recommendation of Buy.
GQG isn’t the only “smart money” fund interested in Procter & Gamble. PG boasts several other notable billionaire investors, including Trian Fund Management’s Nelson Peltz.
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Market value: $301.8 billion
Dividend yield: 3.6%
Billionaire investor: James Hambro & Partners
Percent of portfolio: 6.8%
JPMorgan Chase (JPM, $99.04), the nation’s largest bank by assets, is naturally a hit with hedge funds. But one name in particular stands out: James Hambro & Partners ($3.8 billion in AUM).
Hambro, known as Jamie, is one of Britain’s richest citizens. And he made the British tabloids a few years back when local authorities shot down his $2.5 million plan to connect two of his adjacent houses in London.
James Hambro & Partners holds 464,463 shares in JPM worth about $43.7 million for the most recent reporting period, after upping the position by about 11% in Q2. The stake accounts for 6.8% of the investment firm’s portfolio.
The pros on average put JPMorgan among the Dow stocks they recommend you buy, but it’s hardly unanimous. Seventeen analysts rate JPM at Buy or better, while eight say Hold. One analyst even has a rare Sell recommendation on the stock.
Berkshire Hathaway’s (BRK.B) Warren Buffett was busy last quarter, trimming his stakes in numerous financial stocks, as well as credit-card processors Visa (V) and Mastercard (MA).
But he left untouched his position in American Express (AXP, $103.89), which continues to exemplify Buffett’s saying that his preferred holding period is “forever.”
Buffett initiated his stake in the credit card company in 1963, when a struggling AmEx badly needed capital. Berkshire obliged, getting favorable terms on its investment.
Berkshire owns 151.6 million shares in the Dow Jones Industrial Average component worth about $14.4 billion. That makes the holding company AXP’s largest shareholder with 18.8% of its shares outstanding.
AmEx isn’t exactly small potatoes to Warren Buffett, either. The Berkshire Hathaway portfolio is teeming with Dow stocks, but few carry as much weight as AXP at 7.1% of equity assets.
Washington, D.C.-based advisory firm Marshfield Associates (AUM $3 billion) is one of several big-money funds that is building up its stake in Visa (V, $203.54). Marshfield upped its ownership to 737,782 shares by the end of the second quarter. The position, which is more than 7% of its portfolio, is worth about $142.5 million as of the most recent reporting period.
Visa’s appeal is easy to understand. As the world’s largest payments processor, Visa is uniquely positioned to take advantage of the explosive global growth in digital mobile payments and other cashless transactions. No wonder that its stock has more than rebounded from its COVID bear-market losses, with the stock up 8% year-to-date as investors look ahead toward the global recovery.
Marshfield isn’t the biggest “big money” name in Visa, of course. Among the billionaires with a holding in Visa is Warren Buffett. While he did recently trim his position, as mentioned before, Berkshire still holds nearly 10 million shares in the Dow stock.
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Market value: $303.7 billion
Dividend yield: 2.1%
Billionaire investor: Ensemble Capital Management
Percent of portfolio: 8.1%
Ensemble Capital Management (AUM $1.0 billion), an advisory in Burlingame, California, is one of several billionaires that have a sizable position in Home Depot (HD, $282.10).
Indeed, Ensemble raised its stake in HD by 156% in the most recent quarter to 249,102 shares worth $62.4 million. Home Depot now accounts for 8.1% of the equity portfolio, making it the second-largest position behind only Netflix (NFLX, 8.6%).
And why not? Ensemble’s existing stake in Home Depot has served it well. HD shares have gained 29% year-to-date as the nation’s largest home improvement retailer was allowed to stay open throughout the country’s lockdowns, and benefited from people stuck at home sprucing up their abodes.
Analysts think it has farther to run. Home Depot sits among the upper half of Dow stocks, according to the analyst community. The pros have an average recommendation of Buy, according to S&P Global Market Intelligence, and they expect average annual earnings growth of 7.5% over the next three to five years.
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Market value: $1.59 trillion
Dividend yield: 1.1%
Billionaire investor: TCI Fund Management
Percent of portfolio: 11.7%
Microsoft (MSFT, $210.38), the largest company in the world by market value, has plenty of billionaire investors. But one noteworthy top holder is TCI Fund Management, led by hedge-fund chief Chris Hohn.
The London-based fund has $25.2 billion in managed securities and a top 10 holdings concentration of 95%, and Hohn’s personal net worth is estimated at $5 billion.
Microsoft is a natural stock pick for pretty much any institutional investor’s portfolio. Its Windows operating system still is the most popular in the world, and the company has fully figured out how to drive recurring revenue by selling cloud-based services (including its Office productivity suite) to both enterprise and retail customers.
Almost 12% of the value of TCI’s holdings stem from its 14.5 million MSFT shares. The fund’s stake was worth $2.9 billion as of the second quarter. Indeed, TCI likes Microsoft so much it bought another 458,722 shares last quarter.
The pros love Microsoft, too. It’s the top-ranked Dow stock at the moment, with 23 Strong Buys and eight Buys versus just four Holds, according to S&P Global Market Intelligence.
Goldman Sachs (GS, $201.80) was among the more notable stocks that Warren Buffett purged from Berkshire Hathaway’s portfolio in Q2. The Wall Street investment bank stock still has plenty of fans, however.
One of them is Greenhaven Associates, which made GS its second-largest holding during the second quarter. The firm bought another 39,533 shares in the Dow stock to bring its position to 2,947,430 shares worth $582.5 million. That accounts for 12.9% of Greenhaven’s holdings.
Greenhaven’s other top stock picks include Morgan Stanley (MS), GM and homebuilder Lennar (LEN). And just for good measure, it also has a small stake in Berkshire Hathaway.
Interestingly, Greenhaven’s Edgar Wachenheim is the author of Common Stocks and Common Sense, a well-received book describing the fund chief’s investing philosophy.
“I don’t think of Apple as a stock,” Warren Buffett says. “I think of it as our third business.”
While Buffett might be silent about many of his equity holdings, he’s never short of words for Apple (AAPL, $116.50), which at 44% of the Berkshire portfolio is the undisputed king of the Buffett stocks. Thanks to both its monumental run (heading into a late-August stock split), as well as lousy performances in several of Berkshire’s other holdings, shares in the roughly $2 trillion company make up the largest position in Berkshire Hathaway’s equity portfolio by a mile.
The Oracle of Omaha has only occasionally dabbled in technology stocks. But he bought Apple with two fists, and he’s more than happy to discuss his ardor for AAPL. As he has said more than once on CNBC, he loves the power of Apple’s brand and its ecosystem of products (such as the iPhone and iPad) and services (such as Apple Pay and iTunes).
“It’s probably the best business I know in the world,” Buffett said in February. “And that is a bigger commitment that we have in any business except insurance and the railroad.”
With more than 245 million shares, Berkshire is Apple’s third-largest shareholder after Vanguard and BlackRock – giants of the passively managed index fund universe. Buffett, with a net worth of roughly $81 billion, according to Forbes, owns 5.7% of Apple’s shares outstanding.
But while Snowflake does represent an unusual purchase for Buffett’s holding company, it’s hardly his only growth play. The Berkshire Hathaway equity portfolio is, in fact, teeming with growth stocks. Its single-largest holding is a high-performance tech equity, and another blue-chip name Buffett has held for more than 50 years is a growth stock. The designation applies to a host of other holdings, too.
Given that growth has been outperforming value for roughly a decade now, it’s worthwhile to suss out the best of Warren Buffett’s growth stocks. Read on as we look at Berkshire’s top growth holdings based on analysts’ long-term earnings expectations, which range from anywhere between about 9% and more than 40% annually.
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Shares held: 14.2 million
Holding value: $1.4 billion*
Percent of portfolio: N/A
Analysts’ average recommendation: Sell
Analysts’ average LT earnings growth rate: N/A
Snowflake (SNOW, $228.85) is a rarity among Berkshire Hathaway stocks in that Warren Buffett & Co. actually bought shares by way of the company’s initial public offering in mid-September.
“In 54 years, I don’t think Berkshire Hathaway has ever bought a new issue,” Buffett told CNBC ahead of the IPO, which raised $3.4 billion in the largest ever software offering.
SNOW, which offers a way for companies to run their software on various cloud platforms, be they provided by Amazon.com, Microsoft (MSFT) or Google parent Alphabet (GOOGL), has “hot growth stock” written all over it. Indeed, shares more than doubled in the first day of trading.
Given Buffett’s general aversion to technology stocks, the SNOW investment was likely the idea of one of his subalterns, Ted Weschler or Todd Combs. Buffett has made his ardor for Amazon.com and Apple clear, but that’s because of their prowess in retail more than technology.
Snowflake has no long-term consensus earnings growth estimate yet. It’s too new. In fact, only one analyst tracked by S&P Capital IQ covers SNOW, and that lone analyst has a Sell rating on shares. But the company still clearly has massive growth potential given estimates for revenues to more than double to $574.30 million in 2021, then jump another 67% annually to reach $2.7 billion by 2024.
Along the same lines is StoneCo (STNE), the Brazilian financial payments play that Berkshire has owned since late 2018. While Wall Street on average expects a 30.6% profit growth rate through 2023, the lack of growth estimates a couple years further out leaves STNE without a composite long-term average, unlike the rest of the stocks you’ll read about. Still, it’s clear the pros see exciting things for StoneCo going forward.
* Based on the Sept. 21 closing price of $228.85 per share.
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Shares held: 20.9 million
Holding value: $563.6 million
Percent of portfolio: 0.28%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 8.9%
Warren Buffett is the farthest thing from a gold bug. “It doesn’t do anything but sit there and look at you,” he’s been known to say. But investing in gold isn’t exactly the same thing as investing in a gold miner such as Barrick Gold (GOLD, $28.19).
True, mining stocks are sensitive to the price of whatever commodity they are digging out of the ground. But at least they produce something, as in cash flow. In the case of Barrick, it even pays a small dividend.
Besides, Barrick has more going for it than gold. It also mines copper, which is used in just about everything. As such, it’s a bet on a return to global growth.
Although it is engaged in the mining of the “barbarous relic,” GOLD is included in more than a dozen growth indices and has a long-term growth forecast of 8.9% annually, according to S&P Capital IQ.
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Shares held: 24.7 million
Holding value: $6.8 billion
Percent of portfolio: 3.3%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 9.0%
Moody’s (MCO, $280.04) is a business and financial services firm best known for its Moody’s Investors Service credit rating arm – one of the three major American business credit ratings agencies alongside Standard & Poor’s and Fitch Ratings.
Additionally, it offers financial analysis technology via Moody’s Analytics, and it’s expected to deliver a pretty good long-term growth rate as well. Analysts polled by S&P Capital IQ project MCO to produce average annual earnings growth of 9%.
“We remain confident in Moody’s earnings growth drivers (favorable secular drivers, pricing power, emerging market growth, GDP-driven issuance, and improving margins),” write William Blair analysts, who rate MCO at Outperform (equivalent of Buy).
MCO is a longtime, significant holding in the Berkshire Hathaway equity portfolio. Indeed, at more than 3% of the Berkshire Hathaway portfolio, Moody’s is a top-10 Buffett stock.
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Shares held: 4.3 million
Holding value: $1.3 billion
Percent of portfolio: 0.65%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 9.3%
Not many brick-and-mortar retailers can claim a long-term growth forecast of 9.3%, but Costco (COST, $339.57) isn’t just any retailer. In fact, the company has boasted double-digit year-over-year comparable-store sales growth for several months on end now.
And unlike many Buffett growth stocks, the Oracle is happy to talk about the warehouse club.
“Here (Kraft Heinz is), 100 years plus, tons of advertising, built into people’s habits and everything else,” Warren Buffett told CNBC in a February 2019 interview. “And now, (Costco’s) Kirkland, a private-label brand, comes along and with only 250 or so outlets, does 50% more business than all the Kraft Heinz brands.”
Indeed, Costco’s Kirkland store-branded products are one of the warehouse retailer’s biggest draws.
Costco is not a particularly large holding, at 0.65% of the Berkshire Hathaway portfolio, but it seems to be a cherished one.
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Shares held: 151.6 million
Holding value: $14.4 billion
Percent of portfolio: 7.1%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 10.2%
Buffett likes to say this his preferred holding period is “forever.” Look no further than Dow component American Express (AXP, $98.17) to understand just how serious he is about investing for the long haul.
Berkshire entered its initial stake in the credit card company in 1963, when a struggling AmEx badly needed capital. Buffett obliged, getting favorable terms on his investment. He has played the role of white knight many times over the years, including during the 2008 financial crisis, as a means to get stakes in good companies at a discount.
Berkshire Hathaway, which owns 18.8% of American Express’ shares outstanding, is by far the company’s largest shareholder. (No. 2 Vanguard owns 6.0%.) Buffett praised the power of AmEx’s brand at Berkshire’s 2019 annual meeting: “It’s a fantastic story, and I’m glad we own 18% of it,” he said at the time.
As for growth: The pros are looking for double-digit earnings expansion over the next three to five years, according to S&P Capital IQ.
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Shares held: 980.6 million
Holding value: $89.4 billion
Percent of portfolio: 43.9%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 11.5%
“I don’t think of Apple as a stock. I think of it as our third business.”
That’s one of the many songs of praise Buffett has belted out for Apple (AAPL, $110.08), which is the undisputed king of the Buffett stocks. Shares in the nearly $2 trillion company now make up nearly 44% of the Berkshire Hathaway portfolio’s value – its single largest holding, and it’s not even close.
The Oracle of Omaha has only occasionally dabbled in technology stocks. But he bought Apple with two fists, and he’s more than happy to discuss his ardor for AAPL. As he has said more than once on CNBC, he loves the power of Apple’s brand and its ecosystem of products (such as the iPhone and iPad) and services (such as Apple Pay and iTunes).
“It’s probably the best business I know in the world,” Buffett said in February. “And that is a bigger commitment that we have in any business except insurance and the railroad.”
Perhaps most incredible, even with a market value of almost $2 trillion, analysts still forecast AAPL to deliver average annual earnings growth of 11.5% over the next three to five years. That puts it among the best growth stocks in Berkshire’s repertoire.
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Shares held: 9.9 million
Holding value: $1.9 billion
Percent of portfolio: 0.95%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 14.5%
Visa (V, $197.45) operates the world’s largest payments network, and thus is well-positioned to benefit from the growth of cashless transactions and digital mobile payments. Like Mastercard, Visa was the idea of lieutenants Todd Combs and/or Ted Weschler (Buffett won’t tell). And like Mastercard, Buffett wishes Berkshire had bought more.
No doubt the company’s expected long-term growth rate of 14.5% adds to its appeal.
Berkshire Hathaway first bought Visa in the third quarter of 2011, and it has proven to be a mammoth winner. Including dividends, Visa stock has delivered an annualized return of more than 28%.
“If I had been as smart as Ted or Todd, I would have (bought Visa),” Buffett told shareholders at the 2018 annual meeting.
The Visa stake is a modest but not insignificant holding at roughly 1% of Buffett’s portfolio. However, Berkshire’s half-percent stake in Visa doesn’t even put it among the top 25 investors.
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Shares held: 50 million
Holding value: $293.5 million
Percent of portfolio: 0.14%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 15.1%
Sirius XM (SIRI, $5.11) – a company that reaches more than 100 million listeners via its core satellite radio business and Pandora, which it acquired in 2018 – has an eye-opening long-term growth forecast of 15.1%.
Buffett first bought shares in SIRI during the final quarter of 2016, but his affinity for the position has been waning of late.
Berkshire sold a small portion (1%) of its Sirius XM position during the third quarter. The Oracle of Omaha then trimmed his position by another 3.9 million shares, or about 2% of Berkshire’s stake, in Q1 2020.
Berkshire Hathaway really took out the hatchet during this year’s second quarter, however, unloading more than 82 million shares, or 62% of the remaining stake. That brings its ownership down from 3% to a little more than 1%. But that still makes Buffett the fourth-largest owner of SIRI stock, but well behind majority shareholder Liberty Global’s (LBTYA) 72% stake.
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Shares held: 20.1 million
Holding value: $446 million
Percent of portfolio: 0.22%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 17.5%
Synchrony Financial (SYF, $25.90) jibes with Buffett’s affection for credit-card companies, which, as a group, are high-growth names.
A major issuer of charge cards for retailers, Synchrony was spun off of GE Capital in 2014. It’s both a lender and a payments processor – like Buffett’s beloved American Express – but it caters to customers who skew more toward the middle and lower end of the income scale.
Analysts project the company to generate average annual earnings growth of 17.5% over the next three to five years, according to a survey by S&P Capital IQ.
Interestingly, Buffett trimmed 3% of his stake in Q1 but left it alone in the second quarter, despite cutting a number of other financial-stock holdings. He now owns 3.4% of Synchrony Financial’s shares outstanding, which makes him the firm’s seventh-largest shareholder.
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Shares held: 1.7 million
Holding value: $425.2 million
Percent of portfolio: 0.21%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 18.2%
Warren Buffett, who already is positioned in home furnishings retail via its Nebraska Furniture Mart subsidiary, added more exposure to the space with his Q3 2019 entry into RH (RH, $313.97).
RH, formerly known as Restoration Hardware, operates 107 retail and outlet stores across the U.S. and Canada. It also owns Waterworks, a high-end bath-and-kitchen retailer with 15 showrooms. Not unlike Costco, RH has a hot growth rate for a brick-and-mortar retailer. Indeed, analysts’ projected long-term growth rate stands at 18.2%.
Buffett typically doesn’t comment on Berkshire Hathaway’s holdings, and that’s true for RH, so it’s not certain exactly what attracted the Oracle of Omaha. It is possible this was a move made by Buffett lieutenant Ted Weschler or Todd Combs. But the stake fits broadly with Buffett’s worldview. Buffett stocks tend to be bets on America’s growth, which is exactly what a bet on housing and housing-related industries is.
Berkshire is now the fourth-largest investor in the home retailer by virtue of owning about 8.9% of all RH shares outstanding.
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Shares held: 4.6 million
Holding value: $1.4 billion
Percent of portfolio: 0.66%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 18.5%
Warren Buffett gives credit where credit is due. While Berkshire Hathaway does indeed own Mastercard (MA, $327.85), he has nodded to his portfolio managers Todd Combs and Ted Weschler, and said he wishes he had pulled the trigger on the opportunity earlier.
“I could have bought them as well, and looking back, I should have,” Buffett said about Visa and Mastercard in 2018, referring to his own investment in American Express.
Mastercard, which boasts 926 million cards in use across the world, is one of several growth stocks in the payment processing industry under the Berkshire umbrella. However, after mostly leaving the stock alone since entering a position during the first quarter of 2011, Buffett sold off 300,000 shares, or 7% of the stake, in Q2 2020.
No one knows why Berkshire trimmed its position, but presumably it wasn’t because of Mastercard’s growth prospects. Analysts’ long-term growth forecast sits at 18.5%, according to S&P Capital IQ.
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Shares held: 533,300
Holding value: $1.5 billion
Percent of portfolio: 0.72%
Analysts’ average recommendation: Strong Buy
Analysts’ average LT earnings growth rate: 33.1%
Amazon.com (AMZN, $2,960.47) has been one of the most electric blue chips of 2020, as well as one of the splashiest recent additions to the Berkshire Hathaway portfolio. And with a long-term growth forecast of 33.1%, it’s fair to assume that AMZN will continue on its electrifying ways.
The holding company disclosed its 483,300-share position after the first quarter of 2019, then added another 54,000 shares the next quarter.
Amazon wasn’t Buffett’s idea, by his own admission. Before Berkshire Hathaway submitted its first-quarter regulatory filing with the Securities and Exchange Commission, Buffett told CNBC: “One of the fellows in the office that manage money … bought some Amazon, so it will show up (when that file is submitted).”
Buffett has long been an admirer of Amazon CEO Jeff Bezos, he admitted in an interview, and said he wished he’d bought the stock sooner. “Yeah, I’ve been a fan, and I’ve been an idiot for not buying (AMZN shares),” Buffett told CNBC.
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Shares held: 5.2 million
Holding value: $2.7 billion
Percent of portfolio: 1.3%
Analysts’ average recommendation: Buy
Analysts’ average LT earnings growth rate: 41.4%
Charter Communications (CHTR, $614.34) markets cable TV, internet, telephone and other services under the Spectrum brand, which is America’s second-largest cable operator behind Comcast (CMCSA). It greatly expanded its reach in 2016 when it acquired Time Warner Cable and sister company Bright House Networks.
Buffett entered CHTR in the second quarter of 2014, but he has seemingly lost his love for the telecom company in recent years. His position has been trimmed down from 9.4 million shares in early 2017 to just 5.2 million shares as of Berkshire’s most recent 13F, including a 210,000-share reduction in Q2 2020.
Certainly, Wall Street’s long-term growth forecast wasn’t a deciding factor in why Buffett trimmed his stake. Indeed, CHTR is the best growth stock Berkshire holds, according to an average annual growth forecast of 41.4% over the next three to five years.
Berkshire Hathaway’s remaining stake represents 1.3% of its holdings, and a decent-sized 2.5% ownership in Charter.
Cloud infrastructure company Snowflake has pulled off the largest software IPO in history. Warren Buffett, who typically avoids IPOs, is onboard.
Cloud infrastructure unicorn Snowflake (SNOW) just executed a blockbuster initial public offering (IPO), and one of the beneficiaries is an unlikely investor.
Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B), has never been a fan of IPOs. He’s said so, on the record, and has notably turned up his nose at some of the most heavily hyped stock market debuts.
Furthermore, despite Apple (AAPL) being Berkshire Hathaway’s single largest holding, Buffett has never really been all-in on technology stocks.
Yet he finds himself with a piece of the Snowflake IPO, which is the biggest software offering in history.
About the Snowflake IPO
Snowflake is a cloud-data warehousing company that plays in a roughly $55 billion annual market – a market that’s expanding. The firm boasts 3,100 customers, 56 of which were each responsible for generating around $1 million in revenues within a 12-month period.
Snowflake is generating a lot of hype because it offers a way for companies to run their software on various cloud platforms, be they provided by Amazon.com (AMZN), Microsoft (MSFT) or Google parent Alphabet (GOOGL), to name just three.
As for the offering itself: Snowflake priced 28 million shares (listed under the ticker “SNOW” on the New York Stock Exchange) at $120 a share Tuesday night. That gives the company a market value of $33.3 billion – about as large as Capital One Financial (COF), Sysco (SYY) or MetLife (MET).
The deal raised $3.4 billion – not just the largest software offering ever, but also the biggest IPO period since Uber Technologies (UBER) raised $8.1 billion in May 2019.
Here’s where Warren Buffett comes in:
Berkshire Hathaway agreed to buy $250 million in Snowflake stock in a private placement at the IPO price of $120 a share; cloud firm Salesforce.com (CRM) made a similar arrangement with Snowflake. The holding company also agreed to buy 4 million shares at the IPO price from Snowflake CEO Robert Muglia in a secondary transaction.
The bottom line? Berkshire Hathaway owned a $735 million stake in Snowflake before shares began trading Wednesday on the New York Stock Exchange.
It’s a bet that’s immediately paying off, too. Shares more than doubled when they finally started trading.
An Uncommon Buffett Investment
Investing in an IPO in this manner is essentially unprecedented in the history of the Berkshire Hathaway equity portfolio. Buffett notably skipped out on Uber’s IPO last year.
“In 54 years, I don’t think Berkshire Hathaway has ever bought a new issue,” Buffett told CNBC at the time. “The idea of saying the best place in the world I could put my money is something where all the selling incentives are there, commissions are higher, the animal spirits are rising, that that’s going to be better than 1,000 other things I could buy where there is no similar enthusiasm … just doesn’t make any sense.”
True, Warren Buffett’s Berkshire Hathaway owned 14.2 million shares, or 8%, of all StoneCo (STNE) stock when the Brazilian financial technology company went public in 2018. But backing a company that later has an IPO isn’t exactly the same thing as investing in a new issue as part of its process of going public.
6 SPACs to Buy for ‘Smart Money’ Returns
Given Buffett’s general aversion to technology stocks, the SNOW investment was likely the idea of one of his subalterns, Ted Weschler or Todd Combs. Buffett has made his ardor for Amazon.com and Apple clear, but that’s because of their prowess in retail more than
SNOW, meanwhile, as a cloud-infrastructure company, is about as “techy” as they come. The software firm also happens to offer a unique angle for those looking for a pure-play bet on the impressive growth of cloud services.
Regardless of where SNOW shares trade in the near term, Berkshire Hathaway’s stake will still represent just a tiny part of its equity portfolio, accounting for perhaps 0.75% of its total holdings.
But it’s an interesting bet nonetheless, and one that bears watching over the quarters ahead to see if Berkshire Hathaway adds to its position.
Warren Buffett’s Berkshire Hathaway (BRK.B) puts up market-clobbering returns over the long-term, but more recently it’s been a struggle. There’s no sugar-coating it: The Oracle of Omaha has had a rough ride through the current bear market.
The S&P 500, which has recovered somewhat from the depths, was down 18.8% from the February market top through April 8. The average return across all of Warren Buffett’s stocks, however, has been a loss of 28.0%.
The Berkshire Hathaway portfolio was built to deliver market-beating return over the long haul, not thrive in a global pandemic. Many of Buffett’s best stocks of late are growthier plays that have turned tail. He’s hardly alone in that, but particularly damaging has been Uncle Warren’s vast holdings in financials, one of the market’s worst sectors so far. His ownership stakes in major airline stocks have likewise been gashed.
Some of Berkshire’s holdings, however, have held up considerably better than the overall market – and a number of them are newer positions, including a few stocks Buffett and his lieutenants picked up just last year.
Here are Warren Buffett’s 11 best stocks of the bear market. Some of these stocks are tried-and-true, old-school value names you typically associate with the famed investor. A few of them, however, exemplify Berkshire’s slow but sure shift toward more modern businesses.
Price and yield data is as of April 8. Percent of portfolio as of Berkshire Hathaway\’s SEC Form 13F filed Feb. 14, 2020, for the reporting period ended Dec. 31, 2019. Data from Berkshire\’s Form 13F and WhaleWisdom. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 2 of 12
MARKET VALUE (CLASS A SHARES): $11.6 billion
DIVIDEND YIELD (CLASS A SHARES): N/A
PERCENT OF PORTFOLIO (CLASS A AND C SHARES): 0.03%
DATE FIRST ACQUIRED: Q4 2013
PERFORMANCE SINCE FEB. 19: -12.1% (vs. -18.8% for the S&P 500)
Liberty Global – which Buffett owns via its Class A (LBTYA, $18.27) and Class C (LBYTK, $17.30) shares – bills itself as the world’s largest international TV and broadband company, with operations in seven European countries. It’s also one of several Berkshire bets on communications and media companies whipped up by billionaire dealmaker John Malone.
The company’s positioning in broadband – practically a necessity before the coronavirus, but certainly moreso now as much of the world’s population is confined to their homes – has helped it withstand some of the bear market’s downturn so far. Though its TV operations are sure to take a hit thanks to drawbacks in advertising.
Rumors had the company buying Univision for $9 billion, but CEO Mike Fries shot that down in February during the company’s most recent quarterly report. That said, Liberty Global does plan to extend its international partnership with Netflix (NFLX).
Berkshire first picked up the Class A shares during the fourth quarter of 2013. The holding company then picked up the non-voting Class C shares a quarter later. Data from S&P Global Market Intelligence shows that Berkshire Hathaway owns a collective 3.7% stake in Liberty Global. Berkshire also is Liberty’s fifth-largest shareholder.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 3 of 12
MARKET VALUE: $9.7 billion
DIVIDEND YIELD: N/A
PERCENT OF PORTFOLIO: 1.20%
DATE FIRST ACQUIRED: Q4 2011
PERFORMANCE SINCE FEB. 19: -10.0%
DaVita (DVA, $76.96), which provides kidney care and operates dialysis centers, serves patients via more than 3,000 dialysis centers in the U.S. and nine other countries. Aging baby boomers and a graying population in many developed markets are broadly expected to provide the company with a strong, secular tailwind.
Naturally, dialysis is one health care treatment that simply can’t go to the wayside, regardless of both the current health care and economic crisis. And in fact, the company is advocating for its patients during the pandemic, recently urging hospitals and other health systems not to limit care to end-stage kidney disease patients afflicted with the coronavirus.
Berkshire disclosed a position in DaVita during 2012’s first quarter. Given that DVA was a large position of Ted Weschler’s Peninsula Capital in his pre-Berkshire days, it wasn’t unreasonable to assume that it was his pick. And Weschler actually confirmed as much a couple years later.
Buffett hasn’t touched the position in years, but Berkshire remains DaVita’s largest shareholder by a wide margin. Its stake of 38.6 million shares accounts for more than 24% of DVA’s shares outstanding.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 4 of 12
MARKET VALUE: $22.5 billion
DIVIDEND YIELD: N/A
PERCENT OF PORTFOLIO: 1.03%
DATE FIRST ACQUIRED: Q4 2012
PERFORMANCE SINCE FEB. 19: -8.5%
Warren Buffett’s good fortune with Verisign (VRSN, $193.20) continues.
Stocks aren’t good or bad in a bubble – one investor’s brilliant purchase often is, depending on timing, another investor’s biggest failure. The example of Verisign – an internet infrastructure service company that quite literally keeps the world connected online and acts as a domain registry for the .com, .net and other top-level domains – comes to mind.
Stanley Druckenmiller, a famed former hedge fund manager, made a $200 million short on tech stocks in early 1999 while investing for George Soros’ Quantum Fund, but lost $600 million in the trade. He then tried to win it back via a big $6 billion buy-in of tech stocks including Verisign … but he lost $3 billion in six weeks as VRSN and several other recent purchases flopped, making it one of the “smart money’s” worst stock calls of all time.
But the Oracle of Omaha has had an entirely different experience.
Berkshire bought Verisign, whose dominance of the space exemplifies Buffett’s love of deep moats, during a dip in the final quarter of 2012. The roughly 3.7 million shares were purchased at an average cost of $38.82 per share. VRSN has returned nearly 400% since the end of 2012, well more than triple the S&P 500’s roughly 124% return including dividends.
That includes a fantastic period of outperformance as one of Buffett’s best stocks during the bear market. VRSN shares have lost just less than 9% so far – half the damage the S&P 500 has sustained since Feb. 19.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 5 of 12
Procter & Gamble
MARKET VALUE: $284.2 billion
DIVIDEND YIELD: 2.6%
PERCENT OF PORTFOLIO: 0.02%
DATE FIRST ACQUIRED: Q1 2005
PERFORMANCE SINCE FEB. 19: -8.2%
It’s no surprise that Procter & Gamble (PG, $115.10) is one of Buffett’s better bets throughout the bear market. Thanks to stay-at-home and similar orders in the U.S. and around the world, a lot of consumer spending has been concentrated to the basics – food, toiletries and the like – produced by consumer staples stocks.
As a result, Procter & Gamble – the name behind brands including Crest toothpaste, Pampers diapers, Tide detergent, and most importantly Bounty paper towels and Charmin toilet paper – has been a smooth operator, outperforming the broader market by about 10 percentage points throughout the bear market.
Interestingly, while P&G is among several Dow stocks in Buffett’s portfolio, it’s also a blue chip that has fallen by the wayside as a Berkshire Hathaway investment.
Buffett came to own P&G via his holding company’s 2005 acquisition of razor-maker Gillette. At the time, Buffett, a major Gillette shareholder, called the tie-up a “dream deal.” Procter & Gamble became one of BRK.B’s biggest equity positions.
That dream didn’t last very long. The Great Recession eroded the pricing power of old-line consumer staples companies such as P&G. The company embarked on a plan to shed 100 underperforming brands. The Duracell battery business happened to be on the list, and Berkshire bought it in 2014 in exchange for PG stock. Two years later, Buffett pared what was left of the P&G stake by 99%. He hasn’t added to the position since.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 6 of 12
United Parcel Service
MARKET VALUE: $84.8 billion
DIVIDEND YIELD: 4.1%
PERCENT OF PORTFOLIO: 0.003%
DATE FIRST ACQUIRED: Q1 2006
PERFORMANCE SINCE FEB. 19: -7.5%
United Parcel Service (UPS, $98.79) has been particularly resilient throughout the downturn. While its business services have no doubt been cramped because of the coronavirus, the rise in e-commerce shipments as people have more delivered to their homes has acted as ballast for the international shipper.
Also, UPS and rival FedEx (FDX) recently received some welcome news, as Amazon.com (AMZN) announced it would be halting the pilot of its shipping service that competed with the two legacy providers.
Too bad UPS is effectively a meaningless position.
At fewer than 60,000 shares, Berkshire’s stake in United Parcel Service is a rump position, leftovers, an odd lot. Buffett entered his UPS position during the first quarter of 2006, purchasing 1.43 million shares worth about $113.5 million at the time. That comes to an average price per share of $79.38. However, UPS never grew to be a major part of Berkshire’s portfolio, and Buffett has pared the position over the years to where it wouldn’t be a surprise if he exited the stake at any time.
The reason? Likely performance. Since March 31, 2006, UPS shares have delivered a total return of just 88%, compared to 185% for the broader market.
Translation: UPS, while sitting among Buffett’s best stocks since mid-February, has been a long-term bust.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 7 of 12
MARKET VALUE: $55.2 billion
DIVIDEND YIELD: N/A
PERCENT OF PORTFOLIO: 0.08%
DATE FIRST ACQUIRED: Q4 2019
PERFORMANCE SINCE FEB. 19: -7.1%
Biogen (BIIB, $316.95) is among the newest Buffett stocks, and it’s another health care play that has managed to stay mostly afloat throughout the downturn. This company’s products include a host of MS treatments, including Avonex, Tysabri and Zinbryta, though it also has leukemia and hemophilia drugs as well.
That said, its fates are most heavily tied at the moment to its Alzheimer’s treatment. Many expect the company to seek out FDA approval for aducanumab this year. And because neither that, nor its current product pipeline, are terribly impacted by the coronavirus pandemic, BIIB shares have endured minimal losses.
Berkshire Hathaway has plenty of health care holdings, so Biogen is a natural fit. However, at 650,000 shares worth more than $192 million as of Berkshire’s last 13F, it’s not a huge stake. It represents less than a tenth of a percent of BRK.B’s equity portfolio, and Berkshire isn’t even in Biogen’s top 25 shareholders by stake size.
Despite Buffett’s history of health care bets, the small stake size indicates this investment might be the idea of lieutenants Ted Weschler or Todd Combs. But the company is inexpensive compared to earnings and generates several billion dollars of cash flow each year, so Biogen is right at home in Berkshire’s portfolio.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 8 of 12
MARKET VALUE: $1.0 trillion
DIVIDEND YIELD: N/A
PERCENT OF PORTFOLIO: 0.41%
DATE FIRST ACQUIRED: Q1 2019
PERFORMANCE SINCE FEB. 19: -5.9%
Amazon.com (AMZN, $2,043.00) is one of Berkshire Hathaway’s splashiest new stock picks of the past year or so. The holding company disclosed its 483,300-share position after the first quarter of 2019, then added another 54,000 shares in Q2.
It’s also been an unsurprising outperformer throughout the coronavirus outbreak. Not only has its home delivery proven vital to its customers as they remain homebound, but its Prime Video streaming content is getting more play. Not to mention, any companies that use its Amazon Web Services cloud platform can’t just pull the plug as they try to remain operational.
This one wasn’t Buffett’s idea, by his own admission. Before Berkshire Hathaway submitted its first-quarter regulatory filing with the Securities and Exchange Commission, Buffett told CNBC: “One of the fellows in the office that manage money … bought some Amazon, so it will show up (when that file is submitted).”
Buffett has long been an admirer of Amazon CEO Jeff Bezos, he admitted in an interview, and said he wished he’d bought the stock sooner.
“Yeah, I’ve been a fan, and I’ve been an idiot for not buying” AMZN shares, Buffett told CNBC.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 9 of 12
MARKET VALUE: $135.1 billion
DIVIDEND YIELD: 0.9%
PERCENT OF PORTFOLIO: 0.53%
DATE FIRST ACQUIRED: Q1 2001
PERFORMANCE SINCE FEB. 19: -5.3%
Costco (COST, $305.97) joined the ranks of the Buffett stocks a long time back – the first quarter of 2001, to be precise. It’s not a particularly large holding, at just more than half a percent of the Berkshire Hathaway portfolio, but it seems to be a cherished one.
Especially of late.
Unlike many retailers, Costco – and just about any other stock doling out groceries and other necessities – have gotten through the bear market relatively unscathed so far. Indeed, COST shares are actually up 4% year-to-date versus a steep loss for the S&P 500. In March, as people in many states geared up for stay-at-home orders, Costco saw overall sales jump by nearly 12%, including a massive 48% spike in online revenues. January and February sales weren’t too shabby either, rising 8% and 14%, respectively.
And unlike many Buffett stocks, the Oracle is happy to talk about Costco at length.
“Here (Kraft Heinz) are, 100 years plus, tons of advertising, built into people’s habits and everything else,” Buffett told CNBC in a February 2019 interview. “And now, (Costco’s) Kirkland, a private-label brand, comes along and with only 250 or so outlets, does 50% more business than all the Kraft Heinz brands.”
Berkshire’s 4.3 million shares represent a roughly 1% equity stake in the company – not insubstantial, but well outside Costco’s top 10 institutional stakes.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 10 of 12
Johnson & Johnson
MARKET VALUE: $377.7 billion
DIVIDEND YIELD: 2.7%
PERCENT OF PORTFOLIO: 0.02%
DATE FIRST ACQUIRED: Q1 2006
PERFORMANCE SINCE FEB. 19: -3.8%
Johnson & Johnson (JNJ, $143.26), like P&G, is another defensive Dow stock that has fallen out of favor with Buffett. BRK.B’s interest peaked more than a decade ago. Now, the diversified health care giant represents nothing more than a token holding.
That’s unfortunate, because JNJ would’ve provided some much-needed stabilization over the past few months. Although consumers have stopped spending on casinos, airplane tickets and other discretionary costs, they’ve plunked down to make sure they have plenty of Johnson & Johnson products for the long haul: Band-Aid, Benadryl and Tylenol.
But you can’t blame Buffett for straying from J&J, given its history of headline-grabbing faceplants. The health care stock struggled with manufacturing problems and allegations of illegal marketing practices in 2010 and 2011. Buffett was critical of the company for those gaffes, as well as for using too much of its own stock in its 2011 acquisition of device-maker Synthes. Disenchanted with Johnson & Johnson, Berkshire dumped most of its stake in 2012.
Berkshire’s current position comes to just 327,100 shares, which represents roughly 0.02% of shares outstanding. This is another holding that could disappear at any time – without making much of a difference, either.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 11 of 12
MARKET VALUE: $33.4 billion
DIVIDEND YIELD: 5.9%
PERCENT OF PORTFOLIO: 4.32%
DATE FIRST ACQUIRED: Q3 2015
PERFORMANCE SINCE FEB. 19: Flat
Kraft Heinz (KHC, $27.32) might be one of Buffett’s best stocks over the past few months. But Warren Buffett likely still regrets his participation in what was one of his biggest deals of the past decade.
Kraft Heinz has put up flat performance against a deeply sagging market thanks to its position as a consumer staples leader. Kraft Heinz is the name behind oh-so-many brands that are seeing an uptick as people are forced to stay at home: Heinz condiments, Ore-Ida potato products, Oscar Mayer lunch meats, Classico pasta sauces, Kool-Aid drinks, Maxwell House coffee and, of course, Kraft Macaroni & Cheese.
In fact, KHC recently announced that the company expects 3% sales growth during the first quarter – much better than analysts were expecting, and a rare bit of good news for a company that has been mostly trouble for Uncle Warren.
Buffett was one of the driving forces behind the 2015 merger of packaged-food giant Kraft and ketchup purveyor Heinz to create Kraft Heinz. Berkshire Hathaway owns 26.7% of Kraft Heinz, making it the food company’s second-largest shareholder. (Private investment firm 3G Capital – who teamed up with Berkshire in 2013 to purchase H.J. Heinz – is tops at 48.8%.) And it’s Berkshire’s sixth-largest stock investment with a market value of $10.5 billion as of the company’s most recent Form 13F.
However, Berkshire Hathaway recorded a $3 billion non-cash loss from an impairment of intangible assets in 2018, “arising almost entirely from our equity interest in Kraft Heinz,” Buffett wrote in his 2019 letter to shareholders. In early 2019, KHC wrote down the value of its brands by nearly $15 billion. And this year, Fitch downgraded the company’s debt to junk status.
Warren Buffett’s 11 Best Stocks of the Bear Market | Slide 12 of 12
MARKET VALUE: $24.1 billion
DIVIDEND YIELD: 2.1%
PERCENT OF PORTFOLIO: 0.23%
DATE FIRST ACQUIRED: Q4 2019
PERFORMANCE SINCE FEB. 19: +5.0%
Top among Buffett’s best stocks since mid-February is one of his newest acquisitions.
Kroger (KR, $31.02) is one of a handful of retailers allowed to remain open in many states. The nation’s largest pure-play supermarket chain is not just an “essential service,” but it has experienced frenzied buying as people stock up for their quarantines.
That stepped-up business isn’t likely to go away soon, either, as people are expected to maintain some level of social distancing even after government mandates are pulled, whenever that might be.
Kroger admittedly was a bit of a head-scratcher when Buffett bought in. Many long-term investors had soured on traditional supermarket chains in a world where Walmart (WMT), Amazon.com and other large firms are vying to rule the grocery space.
It also was something of a reversal from Berkshire’s other new positions, which have been a little more forward-looking. Kroger is an old-economy value play, compared to tech and biotech buys such as Amazon, Biogen, Apple (AAPL) and StoneCo (STNE).
Nonetheless, the company’s roughly 2,760 retail food stores – operating under such banners as Dillons, Ralph’s, Harris Teeter and its namesake Kroger – have given Buffett something to smile about over the past few months as his portfolio goes through a rough patch.
When stocks go from setting all-time highs to tumbling 20% into a bear market in only three weeks, there are precious few places for equity investors to hide. But that doesn’t mean defensive, low-volatility stocks aren’t doing their jobs.
Investment professionals helping people construct a diversified portfolio always harp on the need for stocks that will hold up better in hard times. Well, hard times are here, and so it’s time to see exactly how much defense the top performing defensive stocks are actually providing.
We screened the S&P 500 for stocks in classically defensive sectors: consumer staples, utilities, health care and real estate. Next we limited ourselves to low-volatility stocks with a “beta” of less than 1.0. Beta is a measure of volatility that indicates how closely a stock’s price movement correlates with a benchmark.
For example, the S&P 500 has a beta of 1.0. Any stock that has a beta less than 1.0 can be said to be less volatile than the broader market. What this means in practice is that low-beta stocks tend to lag the broader market when stocks are going up, but – critically – they also hold up better when the S&P 500 is in decline.
Recent market carnage means it’s time for defensive, low-beta stocks to shine. Even if they lose value in a selloff, they should lose less value than the broader market. And if they have above-average dividends that further soften losses, all the better.
J. M. Smucker
MARKET VALUE: $12.0 billion
DIVIDEND YIELD: 3.3%
% CHANGE (FEB. 19 TO MARCH 11): -4.6%
Consumer staples are usually a port in a market storm, and we’re seeing some of them hold up quite well – especially the packaged food makers. J. M. Smucker (SJM, $105.59), for instance, was off almost 5% from the Feb. 19 market top to March 11, but that’s far better than the S&P 500’s 19% dive over the same span.
Consumers buy staples such as food, toothpaste, toilet paper and soap regardless of economic conditions, although they do sometimes trade down for cheaper store brands. Smucker’s brands include Folgers coffee, Jif peanut butter and Smucker’s jam. With so many Americans preparing to hole up in their homes for extended periods of time, it’s only natural that they would stock up on long-lived edibles.
That’s what makes low-volatility stocks such as SJM so valuable right now.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 3 of 13
MARKET VALUE: $201.0 billion
DIVIDEND YIELD: 3.1%
% CHANGE (FEB. 19 TO MARCH 11): -3.4%
Health-care stocks are another classically defensive sector, the thinking being that consumers spend on their health in both good times and bad. Merck (MRK, $79.25), a component of the Dow Jones Industrial Average, has suffered limited losses as it brings its considerable firepower to the pandemic fight.
The gargantuan pharmaceutical company is just one of many pharmaceutical companies and biotechnology firms scrambling to develop vaccines and treatments for COVID-19.
Looking a little farther down the road, MRK also has plans of spinning off its women’s health, biosimilars and legacy products into a new company so it can focus on its core growth products, likely by mid-2021.
Wall Street analysts see more upside ahead. Of the 20 analysts covering this low-vol stock who are tracked by S&P Global Market Intelligence, 11 rate the stock at Strong Buy, four say Buy and five call it a Hold.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 4 of 13
Extra Space Storage
MARKET VALUE: $13.5 billion
DIVIDEND YIELD: 3.4%
% CHANGE (FEB. 19 TO MARCH 11): -2.9%
Real estate investment trusts (REITs) are another tried-and-true way to play defense when the outlook is dim.
“U.S. REITs have outperformed the S&P 500 by more than 7% annually in late-cycle periods since 1991 and have oﬀered meaningful downside protection in recessions,” according to global investment manager Cohen & Steers.
Real estate benefits from relatively stable, lease-based cash flows and above-average dividend yields, the investment firm notes. “Furthermore, REITs sell space not goods, so they are less likely to be affected by short-term shocks to the global supply chain.”
Although housing and gambling REITs could get smacked around, a company like Extra Space Storage (EXR, $104.40) should hold up relatively well. EXR owns or operates 1,817 self-storage stores in 40 states, Washington, D.C., and Puerto Rico.
The healthy dividend yield of 3%-plus also gives shares some buoyancy. Better still, that dividend has nearly doubled since 2015, though the most recent hike was fairly modest at just less than 5%, to its current 90 cents per share. And at a beta of around 0.3, EXR is among the most stable of these low-volatility stocks.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 5 of 13
MARKET VALUE: $324.6 billion
DIVIDEND YIELD: 1.9%
% CHANGE (FEB. 19 TO MARCH 11): -2.8%
Walmart (WMT, $114.43) – the ultimate big-box, one-stop-shopping retailer – should benefit from customers stocking up on perishable and non-perishable goods, medication, health-care accessories and many other things housebound Americans need during the pandemic.
Oppenheimer analyst Rupesh Parikh, who rates the stock at Perform (the equivalent of Hold), notes that Walmart historically tends to outperform during recessionary periods. With a five-year beta of 0.43, according to S&P Global Market Intelligence, it has a fairly loose correlation with the S&P 500.
A discount retailer with a wide geographic footprint and vast portfolio of consumer staples isn’t immune from the effects of the pandemic. But for now, investors think it offers some downside protection – and so far, it has.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 6 of 13
MARKET VALUE: $38.5 billion
DIVIDEND YIELD: 3.6%
% CHANGE (FEB. 19 TO MARCH 11): -0.8%
Public Storage (PSA, $220.44) is benefitting from the same dynamics that are propping up Extra Space Storage. The company, which is also a REIT, acquires, develops, owns and operates self-storage facilities. As of Dec. 31, PSA had interests in 2,483 self-storage facilities located in 38 states.
The company’s status as a REIT and healthy dividend payer amid the pandemic has given it a lift, as well as the fact that public-storage companies are something of a recessionary play – when people are forced to downsize their homes, they often keep their other possessions locked away in storage. Its low beta of just around 0.2 is attractive as well.
Nonetheless, analysts aren’t as hot on Public Storage as they are other low-volatility stocks at the moment. Analysts’ average recommendation stands at Hold: Ten analysts call it a Hold, two say Sell and two say Strong Sell, while just a pair of pros call PSA shares a Strong Buy.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 7 of 13
MARKET VALUE: $139.9 billion
DIVIDEND YIELD: 2.1%
% CHANGE (FEB. 19 TO MARCH 11): -0.6%
Eli Lilly (LLY, $140.02) is another big pharmaceutical company that’s joined the crowded race to develop vaccines and treatments for COVID-19. And in a way, it’s personal. LLY confirmed on March 10 that one of its Indianapolis-based employees tested positive for the virus.
Like Walmart and the other low-volatility stocks on this list, Eli Lilly has a fairly weak correlation with the broader market. It tends to underperform the S&P 500 when stocks are rising and outperforms when the market is declining.
Analysts are bullish on the name. Of the 18 analysts surveyed by S&P Global Market Intelligence, five rate the stock at Strong Buy, four say Buy and nine have it at Hold.
Goldman Sachs on March 11 upgraded Eli Lilly to Conviction Buy (strong buy) from Buy, citing its high growth potential. “LLY’s growth profile is among the strongest in US large cap biopharma, driven by exposure to high growth categories (i.e., GLPs for diabetes) and a number of new product cycles,” the analyst firm writes.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 8 of 13
MARKET VALUE: $21.2 billion
DIVIDEND YIELD: 2.5%
% CHANGE (FEB. 19 TO MARCH 11): 2.8%
Clorox (CLX, $169.40) – which we listed among the best stocks to ride out the coronavirus scare – is the first of our low-volatility stocks to be in the green during the big drawdown.
The reasons are fairly clear: Clorox is a consumer staples company that specializes in disinfectant products, be they wipes, sprays, liquid or gels. With coronavirus on the loose, it’s critically important to keep surfaces and other items clean. A decent yield helps, too.
The COVID-19 outbreak – which has bleach and other cleaning products flying off the shelves – has been Clorox’s time to shine after a long period of underperformance. For the 52 weeks ended Feb. 19, CLX gained 5.5% vs. a jump of 22% for the S&P 500.
Current price action might make the stock a trade on the coronavirus, but analysts as a group with an average recommendation of Hold remain skeptical of it as a longer-term holding. Argus Research, however, upgraded shares to Buy from Hold on March 9, as sales of Clorox products should benefit from the coronavirus outbreak. Additionally, the company is adding to its inventory of disinfectants, Argus notes.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 9 of 13
Digital Realty Trust
MARKET VALUE: $28.6 billion
DIVIDEND YIELD: 3.3%
% CHANGE (FEB. 19 TO MARCH 11): 3.5%
Digital Realty Trust (DLR, $137.00), a REIT with data centers on five continents, is another steady real estate play. It’s among low-beta stocks that are less than half as volatile as the broader market. A healthy dividend yield and weak correlation to the S&P 500 helps tamp down volatility.
And, like the other REITs on this list, it’s less likely to get slammed by coronavirus than real estate companies in the hotel and gambling industries.
GorillaTrades strategist Ken Berman noted on March 6 that DLR has substantial short interest – bets against the stock that, if they go wrong, force traders to buy the stock to close those bets. “(That) could be foreshadowing a strong rally,” Berman said.
DLR is fairly well liked among Wall Street’s pros. Over the past month, it has received five Buy ratings versus just one Hold.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 10 of 13
MARKET VALUE: $24.1 billion
DIVIDEND YIELD: 2.1%
% CHANGE (FEB. 19 TO MARCH 11): 3.6%
Kroger (KR, $30.59), the nation’s largest supermarket operator, received a nice lift when it was disclosed on Feb. 14 that Warren Buffett’s Berkshire Hathaway (BRK.B) bought a sizable stake. Kroger was among some of the stocks Buffett bought and sold during the fourth quarter – he picked up 18.9 million shares worth more than $549 million, so Berkshire now owns 2.4% of the grocery empire’s shares outstanding.
As for KR outperforming the broader market during the great COVID-19 selloff, that’s due to its large footprint as a retailer of consumer staples such as food and cleaning supplies.
The company has roughly 2,760 retail food stores operating under such banners as Dillons, Ralph’s, Harris Teeter and its namesake Kroger, as well as 1,537 gas stations. All told, it’s one of the five largest retailers in the world. Anxious consumers looking to stock up could very well cause a spike in sales this quarter.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 11 of 13
MARKET VALUE: $15.2 billion
DIVIDEND YIELD: 2.8%
% CHANGE (FEB. 19 TO MARCH 11): 5.6%
Shares in Campbell Soup (CPB, $50.47) popped 10% on March 3 after CEO Mark Clouse went on a press tour talking up the growing demand for CPB’s products, driven by COVID-19. Campbell Soup is ramping up demand as worried customers stockpile soup.
The packaged-foods company is also working to prevent supply chain disruptions for its wide portfolio of products. In addition to its eponymous soups, CPB brands include Goldfish crackers, Pepperidge Farm cookies and Swanson frozen meals. Clouse notes that only about 10% of Campbell’s products are sourced outside of the U.S., and less than 2% comes from China.
Campbell Soup is having its hero moment along with other low-vol stocks, but it remains to be seen how long it can last. CPB has been a long-time market laggard, and by a wide margin at that. For three years ended Feb. 19, the stock lost more than 19% while the S&P 500 gained 43%. Analysts’ average recommendation remains at Hold.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 12 of 13
MARKET VALUE: $93.3 billion
DIVIDEND YIELD: 3.7%
% CHANGE (FEB. 19 TO MARCH 11): 9.4%
The best-performing stocks in the S&P 500 since the selloff began are two biotechnology names working on drugs for coronavirus.
Gilead Sciences (GILD, $73.30) gained more than 9% as the S&P 500 tanked 19% because it’s working feverishly to address the pandemic.
Gilead is already testing a coronavirus drug in Wuhan province, China, where the outbreak originated. Remdesivir, an antiviral drug developed by Gilead to treat Ebola and SARS, is undergoing crash human trials, and it’s being used to treat some patients on an emergency basis. RBC Capital Markets writes that initial trial results could be available as early as April.
“We expect (GILD) to continue to be viewed as defensive during this outbreak and acknowledge promising signals from the ongoing studies would indeed lead to upside not only for shares, but potentially some relief in the broader markets as well,” RBC writes.
Just note that while Gilead technically makes the list of low-volatility stocks by virtue of a lower beta than the S&P 500, it’s not by much – at 0.99, it’s virtually every bit as volatile. But it has been headed in the more favorable direction: up.
The 12 Best Low-Volatility Stocks of the Market Crash | Slide 13 of 13
MARKET VALUE: $51.1 billion
DIVIDEND YIELD: N/A
% CHANGE (FEB. 19 TO MARCH 11): 15.9%
Regeneron Pharmaceuticals (REGN, $464.70) is the only equity on this list of low-volatility stocks that doesn’t have a dividend. But it has been one of the best stocks of the past 10 years, and it has been the best S&P 500 stock since the bull market abruptly ended last month.
News that Regeneron was expanding its work on COVID-19 treatments helped the stock gain 32% in February alone. (Incidentally, REGN had a miserable 2019, falling as much as 27% at one point before finishing up less than 1%.)
Regeneron and partner Sanofi (SNY) are working with the U.S. Department of Health and Human Services to combat COVID-19. The firms are currently rushing to perform a clinical trial to test the effectiveness of their Kevzara rheumatoid arthritis drug against novel coronavirus.
Warren Buffett, chairman and CEO of legendary holding company Berkshire Hathaway (BRK.B), is often called the greatest value investor of all time. Although Buffett identifies targets based on their “intrinsic value,” a number of Berkshire’s holdings look like cheap stocks by more prosaic value indicators, too.
Not every stock held by Berkshire Hathaway is necessarily a bargain at its current share price. After all, Buffett has held some of these names for decades. To that end, we scoured Berkshire Hathaway’s portfolio of nearly 50 stocks to find the ones that look like they’re on sale these days.
In some cases, we relied on forward price-to-earnings multiples, which show what a stock costs in light of its expected earnings growth. (The S&P 500, by the way, trades at 18.6 times expected earnings, by Yardeni Research’s calculations.) In others, we also took into consideration book values. And naturally we paid attention to long-term growth forecasts and fundamentals.
After sorting through the Berkshire Hathaway equity portfolio with those criteria in mind, these 10 names stood out among the cheapest Warren Buffett stocks.
SEE ALSO: Every Warren Buffett Stock Ranked: The Berkshire Hathaway Portfolio
Data is as of Jan. 23. Stocks listed in reverse order of forward P/E.
MARKET VALUE: $1.40 trillion
FORWARD P/E: 24.2
SHARES HELD: 248,838,679
HOLDING VALUE: $79,436,771,497
Apple (AAPL, $319.23) is king of the Buffett stocks. The Oracle of Omaha has never been much of a tech investor, but he sure does love Apple. He took his first bite in early 2016, and the iPhone maker has since become Berkshire Hathaway’s single-largest holding.
Amazingly, shares in Apple have more than tripled since early 2016, but they still look like a bargain. Sure, AAPL stock goes for more than 24 times expected earnings — more than the S&P 500’s 18.6. But the company is forecast to deliver average annual earnings growth of 11.5%. The S&P 500 is expected to increase adjusted earnings at a rate in the single digits.
Apple accounts for more than a quarter of the total value of Berkshire Hathaway’s equity portfolio. And unlike many of Berkshire Hathaway’s holdings, Buffett has been happy to discuss his ardor for AAPL. As he has said more than once on CNBC, he loves the power of Apple’s brand and its ecosystem of products (such as the iPhone and iPad) and services (such as Apple Pay and iTunes).
“I do not focus on the sales in the next quarter or the next year,” Buffett has said. “I focus on the … hundreds and hundreds and hundreds of millions of people who practically live their lives by (the iPhone).”
MARKET VALUE: $107.5 billion
FORWARD P/E: 15.2
SHARES HELD: 151,610,700
HOLDING VALUE: $19,917,097,659
Buffett likes to say this his preferred holding period is “forever.” Look no further than Dow component American Express (AXP, $131.37) to understand just how serious he is about investing for the long haul.
A 12.5% average annual return over the past quarter-century would make most investors glow — and more than justifies AXP trading at 15.2 times its earnings forecast.
Buffett picked up his initial stake in the credit card company in 1963, when a struggling AmEx badly needed capital. Berkshire obliged, getting favorable terms on its investment. Buffett has played the role of white knight many times over the years, including during the 2008 financial crisis, to get stakes in quality companies at a discount. (Think: Goldman Sachs and Bank of America.)
Berkshire Hathaway, which owns 18.3% of American Express’ shares outstanding, is by far the company’s largest shareholder. No. 2 Vanguard owns less than 6%. Buffett praised the power of AmEx’s brand at Berkshire’s 2019 annual meeting: “It’s a fantastic story, and I’m glad we own 18% of it,” he said.
MARKET VALUE: $50.3 billion
FORWARD P/E: 14.4
SHARES HELD: 10,758,000
HOLDING VALUE: $352,216,920
Warren Buffett made a move in the energy sector by initiating a position in Suncor Energy (SU, $32.74) during the fourth quarter of 2018. And it’s a twofold rarity among Buffett stocks: It’s an energy stock, and it’s not U.S.-based.
If this bet on Canada’s biggest oil-and-gas company sounds familiar, it should: This is the second time Berkshire Hathaway has taken a stab at Suncor. The company originally invested in the energy giant in 2013, then sold the entirety of the position three years later. Suncor – an integrated giant whose operations span oil sands developments, offshore oil production, biofuels and even wind energy – also sells its refined fuel via a network of more than 1,500 Petro-Canada stations.
And did we mention SU is on sale? The stock trades at a discount to the broad market and a deep discount compared with its own five-year average.
Suncor also is a member of the Canadian Dividend Aristocrats by virtue of having raised its annual dividend payouts for 17 consecutive years.
MARKET VALUE: $10.3 billion
FORWARD P/E: 13.9
SHARES HELD: 38,565,570
HOLDING VALUE: $3,104,528,385
Berkshire disclosed a position in DaVita (DVA, $80.50) during 2012’s first quarter.
By forward P/E, DVA trades at a significant discount to its own five-year average of 16.7 times earnings.
DaVita, which provides kidney care and operates dialysis centers, serves more than 1.7 million patients in the U.S. and nine other countries. Aging baby boomers and a graying population in many developed markets should provide a strong, secular tailwind.
Given that DVA was a large position of Ted Weschler’s Peninsula Capital in his pre-Berkshire days, it wasn’t unreasonable to assume that it was his pick. Weschler confirmed as much in 2014.
Bank of America
MARKET VALUE: $301.5 billion
FORWARD P/E: 11.4
SHARES HELD: 927,248,600
HOLDING VALUE: $31,637,722,232
It should be clear by now that Buffett is bonkers for bank stocks. And the crown jewel of his financial sector holdings is Bank of America (BAC, $34.12), the nation’s second-largest bank by assets.
The stock is also a steal these days. BAC trades at only 1.1 times its estimated 2021 book value. JPMorgan Chase (JPM), by comparison, trades at 1.7 times book value.
Buffett’s interest in BAC dates back to 2011, when he swooped in to shore up the firm’s finances in the wake of the Great Recession. In exchange for investing $5 billion in the firm, Berkshire received preferred stock yielding 6% and warrants giving Berkshire the right to purchase BofA common stock at a steep discount. (The Oracle of Omaha exercised those warrants in 2017, netting a $12 billion profit in the process.)
BofA is a big deal for Berkshire Hathaway, and it works the other way around. BAC shares account for a whopping 12.6% of Buffett’s equity portfolio. By the same token, Berkshire is Bank of America’s largest shareholder, at just under 10% of its shares outstanding.
MARKET VALUE: $28.8 billion
FORWARD P/E: 11.3
SHARES HELD: 53,649,213
HOLDING VALUE: $2,972,166,400
Warren Buffett isn’t afraid to admit when he’s wrong and reverse course. And perhaps his most surprising about-face came in regards to the airline industry.
Buffett long excoriated the sector, calling it a “death trap” for investors.
“If a capitalist had been present at Kitty Hawk back in the early 1900s he should’ve shot Orville Wright; he would have saved his progeny money,” Buffett once wrote.
But Southwest Airlines (LUV, $55.40) and the other three major carriers became Buffett stocks in 2016. Years of industry consolidation and Buffett’s confidence in the U.S. economy’s long-term dynamism finally made the time ripe for Berkshire Hathaway to buy.
Southwest is beloved by its customers and employees alike, typically finding itself near the top of “Best Airline” and “Best Places to Work For” lists. Indeed, in 2019, it won awards from J.D. Power, TripAdvisor and InsideFlyer.
LUV shares have mostly treaded water over the past year, which has helped deflate its valuation compared to the rest of the hot-running market. Southwest currently trades at a forward P/E of a little more than 11 – much cheaper than the S&P 500 at present.
Berkshire did pare its position in Southwest by 2% a year ago, but that was only to keep Berkshire’s ownership stake below 10%, which would trigger regulatory hassles. BRK.B remains Southwest’s second-largest shareholder at just a hair under 10% of the company’s shares outstanding, according to data from S&P Global Market Intelligence.
MARKET VALUE: $45.4 billion
FORWARD P/E: 10.5
SHARES HELD: 5,182,637
HOLDING VALUE: $529,043,585
Phillips 66 (PSX, $102.08) is another of Berkshire Hathaway’s handful of energy-sector investments. Buffett first bought shares in the oil-and-gas company in 2012. But despite having heaped praise on PSX in the past, Buffett has dramatically reduced his stake over the past year-plus, even as the stock has become cheaper. PSX trades well below its own five-year average of 13.5 times earnings.
In the first quarter of 2018, he sold a whopping 35 million shares, reducing BRK.B’s stake by more than 40%. That particular move was made only to avoid regulatory headaches. Indeed, the purchaser of the shares was none other than PSX.
As Buffett said at the time: “Phillips 66 is a great company with a diversified downstream portfolio and a strong management team. This transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10%.”
The thing is, Buffett continues to burn off Berkshire Hathaway’s PSX holdings. And Buffett has been characteristically mum on his reasons for those sales.
MARKET VALUE: $49.8 billion
FORWARD P/E: 7.0
SHARES HELD: 72,269,696
HOLDING VALUE: $2,520,766,996
The market doesn’t much like paying a premium for General Motors (GM, $34.88). Historically it trades at about 6.3 times expected earnings. GM is above that level now, but paying seven times earnings for 10% annual growth is still a bargain.
Warren Buffett first took a stake in the world’s fourth-largest auto manufacturer by production, in early 2012. He most recently upped Berkshire Hathaway’s holdings during the fourth quarter of 2018, when he increased his position by 37%.
In many ways, GM looks like a classic Buffett value bet.
General Motors is an iconic American brand and, as the No. 1 domestic automaker, a bet on the long-term growth of the U.S. economy. Buffett has sung the praises of GM CEO Mary Barra on multiple occasions. At one point, he said, “Mary is as strong as they come. She is as good as I’ve seen.”
The dividend yield of 4.4% solidifies GM’s case for being a value pick.
MARKET VALUE: $12.6 billion
FORWARD P/E: 5.3
SHARES HELD: 43,700,000
HOLDING VALUE: $1,258,560,000
American Airlines (AAL, $28.80) is part of the quartet of major airline stocks Buffett bought in late 2016. Like Southwest, American Airlines is dirt-cheap. Unlike Southwest, American Airlines is dirt-cheap because its stock has performed miserably.
AAL shares have lost 23% of their value since the end of 2016’s third quarter – the period during which Berkshire Hathaway initiated its stake in the airline stock. That compares to a 37% gain for Southwest, a 52% climb for Delta Air Lines (DAL) and a 59% performance out of United Airlines (UAL).
The reasons have been myriad. Its operations simply haven’t performed as well as its peers, for one. It also has been impacted by the grounding of Boeing’s (BA) 737 Max jets. Investors also may have been cautious because of its heavy debt load – it boasts total IOUs of $33.4 billion (including $21.4 billion in long-term debt) versus less than $4 billion in cash.
Nonetheless, Buffett’s only selling has been incremental – what he needs to shed to remain below the 10% ownership threshold that would trigger regulatory issues. Berkshire Hathaway holds 9.8% of the firm’s shares outstanding, making it American’s second-largest shareholder, behind only Primecap Management.
MARKET VALUE: $11.3 billion
FORWARD P/E: 4.3
SHARES HELD: 43,249,295
HOLDING VALUE: $449,360,175
Berkshire Hathaway took a stake in Teva Pharmaceutical (TEVA, $10.39) during the fourth quarter of 2017, and at the time, it looked like a classic Warren Buffett value move. The Israel-based drug manufacturer’s stock was off by about 70% from its mid-2015 peak. A bloated balance sheet, mass layoffs and the looming expiration of drug patents had short sellers licking their chops.
TEVA shares have lost 40% of their value since the start of Q2 2018, and that’s after factoring in a 50%-plus rally since they bottomed out in August 2019. The recent positive momentum has come amid stabilization in the company’s generics business and Teva’s work on refinancing and paying down debt.
At the moment, TEVA trades at a mere 4 times analysts’ estimates for future earnings, making it the cheapest Warren Buffett stock of all.
Never say never, but it’s hard to see stocks follow their amazing 2019 returns for a second straight year.
S&P 500 stocks sent the index a whopping 29% higher in 2020. That’s a big deal. Keep in mind that the market’s long-term average annual gain comes to about 7.7%, then factor in the tendency for share performance to revert to the mean, and the odds of another boffo year are slim.
Indeed, years in which the S&P 500 rises at least 20% generate an average gain of only 6.6% the following year, according to Bespoke Investment Group.
But that doesn’t mean investors can’t try to replicate 2019’s party by seeding their holdings with stocks expected to blow away the broader market. To find stocks primed to outperform, we scoured the S&P 500 for stocks with expected price gains of at least 20% this year. We supplemented that research by limiting ourselves to stocks that are Buy-rated or better by Wall Street analysts, as well as boast promising fundamentals, attractive valuations and other bullish features.
Here, then, are 11 of the best S&P 500 stocks you can buy for outsize gains in 2020. Based analysts’ projected price returns, Wall Street expects these names to rally from 20% to more than 35% this year.
Share prices, price targets, analysts’ ratings and other data are courtesy of S&P Global Market Intelligence as of Jan. 9, unless otherwise noted. Companies are listed by implied upside, from lowest to highest. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
MARKET VALUE: $8.0 billion
DIVIDEND YIELD: N/A
IMPLIED UPSIDE: 20.2%
Abiomed (ABMD, $183.60) is one of the best-performing stocks of the past 10 years, but the medical device maker has stumbled of late. ABMD’s shares cratered last year amid concerns over the safety of its temporary heart pump, Impella, that improves blood flow during surgery. The Food and Drug Administration gave the company a clean bill of health, but it’s still trying to regain its footing.
Analysts are split on whether shares are a Buy at current levels, with some calling ABMD a “show-me” stock until revenue growth re-accelerates.
William Blair’s Margaret Kaczor maintained an Outperform (Buy) rating on shares in November following the release of damaging data sets comparing Impella to intra-aortic balloon pumps, but did call it “likely another hurdle that Abiomed will need to overcome as it looks to reaccelerate adoption and utilization of its products.” Around the same time, Raymond James cut its recommendation to Market Perform (Hold) from Outperform, taking a more cautious stance until U.S. growth gets back on track.
The 10 analysts covering ABMD who are tracked by S&P Global Market Intelligence are split: five Buys and five Holds. Still, their average price target of $220.67 gives the stock implied upside just north of 20% over the next 12 months.
MARKET VALUE: $10.8 billion
DIVIDEND YIELD: N/A
IMPLIED UPSIDE: 21.3%
Mylan (MYL, $20.93), a pharmaceutical company perhaps best-known for generic drugs, is poised to deliver big-time returns in 2020. Be forewarned, however, that most of the projected upside will come in the second half of the year.
Mylan is in the middle of closing a deal with Pfizer (PFE) to combine their off-patent drugs into a new company, which will then be spun off to shareholders. Analysts applaud the move, but it could put handcuffs on Mylan until the deal closes. RBC Capital’s Randall Stanicky, who has MYL at Outperform (equivalent of Buy), figures shares will be rangebound until the Pfizer deal closes in mid-year.
However, after getting over the deal-close hump, the RBC analyst sees Mylan shares rallying during the second half of 2020. Indeed, it remains one of RBC’s top stock picks for the next 12 months, projecting 29% upside in that time.
The analyst community’s average price target isn’t as robust, but at $25.40, it still suggests MYL will be among S&P 500 stocks that can generate more than 20% upside in 2020.
MARKET VALUE: $22.3 billion
DIVIDEND YIELD: N/A
IMPLIED UPSIDE: 24.6%
United Airlines (UAL, $87.95) is one of a couple S&P 500 stocks in the airline business that are expected to fly high in 2020.
“Our Best Idea in the group for 2020 is UAL, which we believe has unique company-specific catalysts that should enable the company to better weather the softer conditions,” writes Stephens analyst Jack Atkins, who has an Overweight rating on United with no price target.
Earnings momentum and cost controls also help fuel optimism in United. Argus rates shares at Buy, citing low fuel prices, solid U.S. flight demand and improving margins at airport hubs.
Those are among the 14 analysts who say investors should buy UAL stock, versus seven in the Hold camp. Moreover, United gets an average price target of $109.58, equating to potential upside of nearly 25% over the next 52 weeks.
Furthermore, the stock looks like a bargain. UAL trades at a mere 7 times forward earnings, solidly below its own five-year average of 8, according to StockReports+.
All this is more good news for Warren Buffett. Berkshire Hathaway holds 8.5% of UAL shares outstanding, making it the airline’s second-largest shareholder. United’s stock has delivered an annualized total return of about 20% since the end of Q3 2016, when Berkshire established its stake.
MARKET VALUE: $7.1 billion
DIVIDEND YIELD: 1.2%
IMPLIED UPSIDE: 25.0%
Nielsen Holdings (NLSN, $20.09), the ubiquitous media-ratings firm, is in fact far more than just TV numbers. It’s a global measurement and data analytics firm that helps retailers and packaged-goods companies in more than 100 countries better understand their consumers.
Analysts are encouraged of late that Nielsen is showing improvement in parts of the business that have been under pressure.
The company’s retail measurement business in China is picking up, note William Blair analysts, who rate shares at Outperform. “And Nielsen continues to see growth in national TV measurement and digital measurement,” they write.
Nielsen admittedly has been a dog over the past three years, losing more than half its value over that time and slashing its dividend by 83% late in November. But the company’s plans to spin off the Global Connect business may unlock value and drive optimism in the year ahead.
MARKET VALUE: $5.1 billion
DIVIDEND YIELD: 4.3%
IMPLIED UPSIDE: 27.1%
Hanesbrands (HBI, $14.05) – which makes a wide range of basic apparel for men, women and children – is not a sexy business. True, it makes innerwear, but Hanes underwear will never be mistaken for Victoria’s Secret.
What is attractive about HBI is its potential for serving up market-beating gains this year.
For investors interested in the bull case, Stifel sums it up nicely: “HBI enjoys a leadership position in the U.S. basic apparel landscape and has the opportunity to return to growth in the innerwear category,” Stifel’s analysts write in a note to clients. The potential for cost cuts and underlying free cash flow point to a favorable risk-reward scenario, they add.
The Street’s opinion on the stock averages out to a Buy recommendation, but just barely. Five analysts rate Hanesbrands at Buy, seven call it a Hold and two slap a relatively rare Sell rating on shares. Be that as it may, HBI’s target price of $17.86 gives it implied upside of 27% over the next 12 months or so.
Moreover, Hanesbrands is trading at bargain levels. Shares currently fetch just 8.2 times forward earnings – cheaper than the average among S&P 500 stocks by more than half, and well below HBI’s own five-year average of 12.3, according to StockReports+.
MARKET VALUE: $12.2 billion
DIVIDEND YIELD: 1.4%
IMPLIED UPSIDE: 30.1%
Shares in American Airlines (AAL, $27.95) have been grounded for a long time. The stock is off more than 14% over the past year, and it has lost roughly half its value since early 2015.
But for new money, that pain also sets shares up for a big rebound over the next 12 months or so, analysts say.
“We believe shares of American are fundamentally mispriced, given the value of its loyalty program, which is underappreciated by the market as a result of limited transparency into the economics of that business,” says Stifel, which calls shares a buy. “We expect disclosures to improve over the next 12-18 months, which should result in investors more appropriately valuing the distinct marketing business of selling miles to third parties.”
The pros add that the airline’s core hub growth strategy is off to a good start and it will be winding down capital spending over the next two years.
Put it all together, and Wall Street is looking for upside of 30% over the next 12 months – roughly triple even some of the most optimistic outlooks for the S&P 500 in 2020.
MARKET VALUE: $15.1 billion
DIVIDEND YIELD: 0.8%
IMPLIED UPSIDE: 30.1%
Crude oil prices rose more than 35% in 2019. While they’re not expected to repeat that feat again this year, the outlook is nonetheless stable enough to put Diamondback Energy (FANG, $94.15) on the path to outsize gains.
The oil exploration-and-production (E&P) firm operates solely in the Permian Basin in West Texas. “With presence across more than 394,000 net acres (and) more than 7,000 drilling locations in the basin, the company’s production outlook looks promising,” says Zacks Equity Research, which calls the stock a Buy.
Raymond James analyst John Freeman said that while the company’s 2020 oil volume guidance “spooked” Wall Street last year, he’s optimistic about its oil-volume growth and ability to generate free cash flow. He has a Strong Buy rating on shares and a $110 price target.
The average analyst PT is even higher, at $122.51, giving FANG implied upside of roughly 30% over the next 52 weeks. The pros believe its stock price will be driven by earnings growth of roughly 37% this year.
MARKET VALUE: $24.5 billion
DIVIDEND YIELD: N/A
IMPLIED UPSIDE: 32.2%
Alexion Pharmaceuticals (ALXN, $110.74) has a huge blockbuster drug on its hands and the stock is undervalued, which should lift the stock by about a third in 2020, say Wall Street’s pros.
Alexion’s runaway success, Soliris – for blood diseases paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS) – has been called the most successful rare-disease medicine in history, racking up $3 billion in sales last year alone.
Soliris might face new competition from Apellis (ALPS), whose pegcetacoplan topped Soliris in a late-stage study. JPMorgan analysts point out that any impact to earnings estimates would be “rather modest.” That’s in part because the company is seeing success in switching patients to its follow-up drug, Ultomiris.
Cowen, which includes Alexion on its 2020 best ideas list, says it is one of the few large-cap biotechnology companies with visible revenue growth. And Zacks Equity Research notes that the S&P 500 stock’s shares are cheap, cheap, cheap. The stock trades at just 9.4 times expected earnings, versus an industry average of 25.6.
Meanwhile, Buy calls outpace Holds by a wide 18 to five.
MARKET VALUE: $38.6 billion
DIVIDEND YIELD: 3.6%
IMPLIED UPSIDE: 33.2%
Marathon Petroleum (MPC, $59.39) is among a few energy-sector S&P 500 stocks set up for a hot 2020, analysts say. Adjusted earnings are forecast to rise a whopping 75% this year. The long-term growth rate sits at almost 8% annually for the next three to five years.
Like many analysts, Mizuho Securities, which rates shares at Buy with a $90-per-share price target, says the oil refiner’s stock is undervalued. The solution? Spinoffs. Mizuho cheered activist Elliott Management’s call in September for management to break up the so-called downstream business into three separate companies: refining, midstream and retail. While Marathon didn’t adopt that exact plan, it did agree to spin off its retail operations and change out its CEO.
Marathon Petroleum is one of Mizuho’s top picks, and that goes for Jefferies as well. Jeffries calls the stock a Buy with a $75 price target, calling the company a “diversified, vertically-integrated cash machine with premier assets.” Jefferies also likes that MPC has “clear channels to funnel excess cash to shareholders.”
On Wall Street, 15 analysts have Buy-equivalent ratings on the stock, while three call it a Hold. Their average target price of $79.11 means they expect shares to rise 33% in the next 12 months or so.
MARKET VALUE: $50.1 billion
DIVIDEND YIELD: 4.4%
IMPLIED UPSIDE: 35.2%
It’s pretty counterintuitive that General Motors (GM, $35.08), having suffered its biggest-ever drop in sales in China, is expected to deliver upside of 37% over the next 12 months or so.
But although Chinese economic growth remains lackluster, an end to the U.S. trade war with China could prove to be a powerful catalyst. And let’s not forget about the engines driving GM’s performance. Citigroup, with a Buy rating, praises General Motors’ “unique” North American franchise led by high demand for higher-margin trucks and SUVs.
In fact, even though GM is suffering sluggish sales in China, the Street still forecasts a 5% improvement in General Motors’ revenues in 2020.
And with an eye toward the not-so-distant future, GM plans to unveil 10 electrified or new-energy vehicles in China in 2020 and beyond. That could potentially give it a boost in the country.
It also helps that GM is dirt-cheap. The stock trades at just 5.4 times projected earnings for 2020. That’s a discount even by GM’s inexpensive standards – over the past five years, the S&P 500 stock has traded at 6.3 times forward earnings, according to StockReports+.
MARKET VALUE: $9.3 billion
DIVIDEND YIELD: 2.5%
IMPLIED UPSIDE: 35.7%
You can add lesser-known TechnipFMC (FTI, $20.85) to the list of energy stocks forecast to deliver smoking returns in 2020. The U.K.-based company provides engineering and construction services for oil-and-gas exploration on land and at sea.
It recently strengthened its footprint in Europe after being awarded a contract to construct a new naphtha complex for Greek refiner Motor Oil Hellas. FTI didn’t specify the terms, but reports say the contract could be worth as much as $250 million.
Additionally, analysts note that TechnipFMC could be a tempting acquisition target after the planned spinoff of its engineering business later this year. And even if a deal is not on the horizon, the Street says splitting FTI into two separate publicly traded companies will unlock value.
The pros expect the stock to hit $28.29 over the next 52 weeks, up almost 36% from current levels. That’s tops among S&P 500 stocks for 2020.