Jun 29, 2023
“Bad news is an investor’s best friend,” Warren Buffett said in an op-ed published in the New York Times in 2008. “It lets you buy a slice of America’s future at a marked-down price.” The legendary investor made these comments at the height of the Global Financial Crisis when bad news was seemingly the only thing featured in headlines.
Buffett’s mantra of being greedy when others are fearful is based on valuation. Assets tend to be cheaper when most investors are either too scared or too anxious about putting money to work. Lower valuations, ultimately, enhance long-term returns for investors who are patient enough to ride out the storm.
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With that in mind, here are the top three stocks the Oracle of Omaha is focused on as the American economy teeters on the edge of another recession.
Apple
It may be challenging to imagine Buffett wearing Apple’s new Vision Pro augmented reality headset, but it’s much easier to see why the company dominates his portfolio. Buffett has been accumulating his Apple stake for years and he hasn’t slowed down recently. In fact, the Oracle added another 2.28% to his Apple stake in the latest quarter.
Buffett’s commitment to Apple could continue as long as the company stays the market leader in the consumer technology sector. iOS held onto 27.9% of the global market for mobile phones in the most recent quarter, while new products like the AR headset could boost growth in the years ahead.
Meanwhile, the stock trades at a reasonable price-to-earnings ratio of 31. That seems good enough for the world’s most famous value investor.
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Occidental Petroleum
Crude oil has lost roughly 42% of its value since last year. However, that hasn’t convinced Buffett to ditch his bet on Occidental Petroleum. He raised his stake in the energy producer by another 8.93% in the most recent quarter.
Energy companies have been stubbornly cheap for years. Even after their rally last year, many oil and gas producers were still trading at low single-digit multiples of free cash flow (FCF). This year, oil prices have dropped but these valuations have remained steady. Occidental, for instance, trades at a price-to-FCF ratio of just 5.17 — which implies a free cash flow yield of 19.3%.
Buffett’s commitment to the stock could be a bet on higher shareholder returns and expanded dividends in the years ahead if this free cash situation continues.
HP
Apple wasn’t the only consumer tech company on Buffett’s list. The oracle added 15.77% to his stake in HP Inc., the Palo Alto-based laptop and printer manufacturer. The holding is worth $3.6 billion and is the tenth largest on the Berkshire Hathaway portfolio.
The stock is trading at just over 11 times earnings per share, which could be why Buffett considers it undervalued. HP also offers a 3.5% dividend yield, a big factor that could make it attractive for income seekers.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
