For the better part of the past 58 years, Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett has been running circles around Wall Street. As of the end of 2022, the annualized return of Berkshire’s Class A (BRK.A) shares was double the total return, including dividends paid, of the broad-based S&P 500 since Buffett became CEO — 19.8% vs. 9.9%.
It’s this phenomenal track record that has new and tenured investors mirroring his every trade and riding his coattails to sizable long-term gains.
Entering the second half of 2023, Berkshire Hathaway’s $370 billion investment portfolio has stakes in more than 50 securities. Among these holdings are two Warren Buffett stocks that stand out as screaming buys in July, as well as one exceptionally popular stock that should be avoided like the plague.
Warren Buffett stock No. 1 that’s a screaming buy in July: General Motors
The first Buffet stock that looks like a surefire buy for long-term investors is Detroit automaker General Motors (GM).
Arguably the biggest knock you’ll find in GM’s proverbial motor is the expectation that U.S. economic activity will slow. Auto stocks are highly cyclical, which means a reversal in U.S. gross domestic product would be expected to lead to a tangible slowdown in new-vehicle sales. This tied-at-the-hip cyclical association between auto stocks and the U.S. economy is why automakers are typically valued at a high-single-digit price-to-earnings (P/E) ratio.
While there are plenty of economic indicators that suggest economic weakness is likely, General Motors has, thus far, shrugged them off and continued to fire on all cylinders.
The most attractive catalyst for GM is its push into electric vehicles (EVs), autonomous vehicles (AVs), and batteries. It’s going to take decades to transition consumer vehicles and enterprise fleets to alternative energy sources like EVs, which means GM and its peers are set to enjoy a long-awaited growth renaissance.
In 2021, the company upped its EV and AV spending forecast through 2025 to $35 billion and set an ambitious goal of introducing at least 30 new EV models globally by the end of 2025. Further, CEO Mary Barra has laid out a path to produce more than 1 million EVs annually in North America by mid-decade.
Although General Motors’ future is all about EVs and AVs, it’s important not to overlook the success it’s having with its non-EV lineup. Whereas EV kingpin Tesla is seeing its automotive margin deflate under the weight of a half-dozen price cuts in 2023, Barra has masterfully led GM and allowed the company to increase its automotive free cash flow forecast this year.
To add to the above, General Motors brings more than a century of history and branding to the table that newer EV producers can’t offer. Though intangible, GM’s branding power remains a powerful tool that can drive sales domestically, and potentially in international markets.
General Motors screams “Value!” with its shares trading at just 5.6 times Wall Street’s consensus earnings per share for the current year.
Warren Buffett stock No. 2 that’s a screaming buy in July: Bank of America
The second Warren Buffett stock that can be bought hand over fist in July is Berkshire Hathaway’s second-largest holding by market value, Bank of America (BAC) (also known as “BofA”).
Similar to GM, questions about the health of the U.S. economy are weighing on BofA. Bank stocks are cyclical, which means recessions almost always lead to a rise in loan delinquencies and loan losses. Since recessions are often coupled with dovish Federal Reserve monetary policy, it’s usually a recipe for weaker earnings.
The other concern for Bank of America is the residual impacts the financial sector is dealing with from the short-lived banking crisis that saw SVB Financial‘s Silicon Valley Bank fail, as well as Signature Bank and First Republic Bank get seized. Despite no bank failures in two months, investors appear to be waiting for confirmation that the banking industry is in the clear. With regard to BofA, everything looks sound.
The reason the Oracle of Omaha loves bank stocks is because they’re able to take advantage of disproportionately long periods of economic expansion. As the U.S. economy naturally expands over time, so does the deposit and loan profile for money-center banks like BofA.
But what sets Bank of America apart from other big-bank stocks is its sensitivity to changes in interest rates. The nation’s central bank has been laser-focused on tackling historically high inflation since the first quarter of last year, resulting in the steepest rate-hiking cycle in decades. For banks with outstanding variable-rate loans, every rate hike is putting more net-interest income in their pockets. Even if the U.S. were to dip into a recession, the benefit of higher interest rates could more than offset any loan losses BofA may contend with.
Bank of America also deserves credit for its digital push. Nearly three-quarters of all households banking with BofA are accessing their accounts via the mobile app or online. What’s more, just over half of all sales (51%) were completed digitally in the March-ended quarter. That’s up 18 percentage points from the first quarter of 2020. Since digital banking is far less-costly than in-person interactions for BofA, we’re seeing a discernible improvement in the company’s operating efficiency.
Buying high-quality bank stocks below their book value is generally a smart move for patient investors. At just 89% of its book value, Bank of America represents a screaming bargain.
The Warren Buffett stock to avoid like the plague in July: Apple
However, not all Warren Buffett stocks are worth buying in July. Though I know this is nothing short of blasphemy when discussing Berkshire Hathaway’s holdings, I’d suggest avoiding tech stock Apple (AAPL) like the plague this month.
As of the closing bell on June 28, Apple accounted for almost 47% of Berkshire Hathaway’s invested assets and was the largest publicly traded company by market cap in the United States. In Buffett’s own words, it’s “a better business than any we own.”
If you were to ask, “Is Apple a good business?” the answer would undoubtedly be yes. It’s one of the most-recognized brands in the world, has a very loyal customer base, and it’s been a cash-flow machine for much of the past two decades. The company continually allows its innovation to do the talking, with iPhone leading the way in domestic smartphone sales and the company’s subscription services segment outpacing the growth rate of its physical products.
The problem with Apple is that it’s valuation no longer makes any sense. While it’s common for investors to willingly pay a premium for growth stocks, Apple isn’t growing in fiscal 2023 (Apple’s fiscal year will end in late September).
According to Wall Street’s consensus, Apple is expected to report a revenue and profit decline of roughly 2% to 3% in fiscal 2023. That may not sound like much, but it comes with above-average inflation as a tailwind. On a real-money basis (i.e., including inflation), Apple’s sales are set to decline by the high-single-digits this year.
The culprits for this real-money sales decline look to be Mac and iPhone. Personal-computing demand fell off a cliff once the worst of the COVID-19 pandemic was put into the rearview mirror and life began to return to some semblance of normal. The kick in the pants for Apple is that iPhone sales have declined by $5.1 billion through the first six months of fiscal 2023 when compared to the same period last year. An apparent lack of differentiation to prior 5G-capable models led to underwhelming (by Apple’s standards) sales of the product.
Even with a phenomenal share repurchase program that’s had a discernably positive impact on Apple’s earnings per share, new investors would be paying a multiple of 31 times current-year consensus earnings to own shares of a company with a high-single-digit real-revenue decline. With the exception of a short period during the pandemic, Apple’s stock is the priciest it’s been since the Great Recession.
Apple may be a cash cow, but there’s no reason to pay 31 times earnings for a company with a stalled growth engine.
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