Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has a knack for outperforming Wall Street. Since the beginning of 1965, he’s delivered a 120-times greater return than the benchmark S&P 500, including dividends paid. That’s a 3,641,613% gain for Berkshire Hathaway’s Class A shares (BRK.A) versus a 30,209% total return for the S&P 500, through Dec. 31, 2021.

This outperformance was on display, once again, during the 2022 bear market. Whereas the S&P 500 lost 19%, not including dividends paid, last year, Berkshire Hathaway’s share price advanced 4%. In other words, Berkshire Hathaway’s portfolio is often a great place to look for ideas when investing during turbulent times.

As we move forward into a new year, four of Warren Buffett’s roughly four dozen holdings stand out from the rest as screaming buys.

Bank of America
The first Warren Buffett stock that can confidently be bought hand over fist in the new year is money-center behemoth Bank of America (BAC).

Normally, bank stocks would be an industry investors would want to avoid during a bear market or possible U.S. recession. Bank stocks are cyclical, which leaves them vulnerable to loan losses when economic downturns arise. But things are very different this time around.

With the U.S. inflation rate hitting a four-decade high of 9.1% this past June, the Federal Reserve has had no choice but to aggressively increase interest rates. As rates rise, banks with outstanding variable-rate loans benefit from higher net interest income.

Bank of America’s net interest income jumped $2.7 billion during the September-ended quarter, with the company expecting a further $4.2 billion increase if there’s a 100-basis-point parallel shift in the interest rate yield curve over the next 12 months. In short, the added net interest income BofA generates from the Fed’s hawkish monetary policy should more than offset any near-term increase in loan losses.

Bank of America is becoming a more efficient bank as well. Previously, I’ve praised the company’s investment in various digitization initiatives. The result has been a steady increase in the number of active digital banking customers, as well as a sizable jump in the percentage of loan sales completed online or via mobile app. Not only are digital sales considerably cheaper than in-person interactions for BofA, but this digital shift is allowing the company to consolidate some of its branches and modestly lower its noninterest expenses.

Johnson & Johnson
Buying industry-leading dividend stocks is almost always a smart move during a bear market. That’s why healthcare stock Johnson & Johnson (JNJ) stands out as one of the best Warren Buffett stocks to buy in 2023.

As much as we’d like to be able to flip a switch and simply not get sick during periods of economic weakness, the real world doesn’t work that way. No matter how the U.S. economy or stock market perform, there will always be a need for prescription drugs, medical devices, and healthcare services. This is what provides a rock-solid foundation for giants like J&J.

But don’t overlook Johnson & Johnson’s operating model. This is a company that generates most of its growth and operating margin from developing and selling brand-name therapeutics.

The thing is, brand-name pharmaceuticals have a finite period of sales exclusivity. To avoid the perils of patent cliffs, J&J is constantly replenishing its pharmaceutical pipeline, as well as leaning on its leading medical device segment. As the global population ages and access to medical care improves, medical devices can help offset any potential weakness in J&J’s drug segment caused by patent expirations.

Another reason conservative investors who dislike volatility can trust in Johnson & Johnson is its capital-return program. Johnson & Johnson doles out one of the largest nominal-dollar dividends among publicly traded companies each year and is working on a 60-year streak of increasing its base annual payout.

Amazon
For growth-seeking investors with an appetite for a bit more risk and reward, e-commerce stock Amazon (AMZN) looks like a screaming buy in 2023.

Arguably the biggest hurdle for Amazon to overcome in the new year is convincing Wall Street and investors to ignore the temporary weakness in its highest-revenue operating segment: e-commerce. The interesting thing about Amazon is that, while it generates most of its sales from its world-leading online marketplace, online retail sales bring in very little operating income and cash flow for the company. Instead, it’s Amazon’s ancillary operations that are worth paying attention to, because they’re responsible for the bulk of its operating income and cash flow.

For instance, Amazon Web Services (AWS) is the world’s top cloud infrastructure service provider. Cloud spending is still very much in its early innings, with growth for AWS still pacing close to 30% on a year-over-year basis even in a challenging economic environment. Despite accounting for only around a sixth of Amazon’s net sales, AWS regularly generates half or more of the company’s total operating income. It’s all about the margins — and cloud-service margins blow online retail sales margins out of the water.

Advertising services and subscription services are two additional segments with juicy operating margins and constant-currency sales growth well into the double digits. Amazon had more than 200 million Prime members signed up globally in April 2021, and it’s begun exclusively streaming Thursday Night Football since then. It’s no wonder subscription services are nearing $9 billion in quarterly revenue.

As long as these high-margin ancillary operations keep growing by a double-digit percentage, revenue weakness in Amazon’s e-commerce segment should be no big deal.

Berkshire Hathaway
The fourth and final Warren Buffett stock that’s a screaming buy in 2023 is none other than (drum roll) Berkshire Hathaway.

Since changes were made in July 2018 to the guidelines that allow the Oracle of Omaha and executive vice chairman Charlie Munger to buy back their own company’s stock, they’ve overseen the repurchase of more than $63 billion worth of Berkshire Hathaway shares. Put another way, Buffett and Munger have put more money to work buying back Berkshire stock over the past four years than they have buying shares of Apple and Chevron combined since the beginning of 2016.

One of the primary reasons Berkshire Hathaway’s stock tends to outperform is Warren Buffett’s affinity for dividend stocks. In 2023, Buffett’s company should collect more than $6 billion in dividend income. Companies that regularly pay a dividend are usually profitable on a recurring basis and time tested. Income stocks have also significantly outperformed publicly traded companies that don’t pay a dividend over the long run.

Furthermore, the Oracle of Omaha is big on cyclical stocks. Buffett understands that recessions are an inevitable part of the economic cycle and that trying to guess when they’ll occur is foolish (with a small “f”). But he also realizes that recessions are short lived and that periods of expansion are almost always measured in years. By packing Berkshire Hathaway’s investment portfolio with cyclical stocks, he can sit back and allow these mostly well-known, time-tested businesses to grow with the U.S. and global economy during long-winded periods of expansion.

— Sean Williams

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