InvestingPro Exclusive: 4 Buffett Buys in the Bargain Basement

Here is your VIP list of Pro Picks for the week, offered exclusively to InvestingPro subscribers: a hand-picked selection of stocks that InvestingPro fair value calculations have identified as undervalued.

This week’s installment focuses on undervalued holdings in Warren Buffett’s Berkshire Hathaway portfolio.

For a deeper dive into how InvestingPro’s fair value figures are calculated, read more here.

Kraft Heinz

Kraft Heinz (NASDAQ: KHC ), a longtime Buffett holding, is in the top 10 most undervalued publicly traded stocks in the Berkshire Hathaway (NYSE: BRKa ) (NYSE: BRKb ) portfolio based on InvestingPro’s fair value calculations. And the stock still occupies a significant 3.9% of his portfolio, per the most recent disclosure, with the massive stake amounting to 34.5% of Kraft Heinz.

While the stock has lost ground for the year, its relative strength index (RSI) suggests it has been oversold. And parallel to this, revenue growth has been accelerating, with the company’s top-line figures crushing most any other company in the sector. In terms of its bottom line, Kraft Heinz has maintained healthy margins in profit and cash flow that have beaten out the vast majority of peers. Most impressively, it has - like clockwork - surpassed analyst earnings estimates for the past 17 quarters straight.

Perhaps it comes as no surprise, then, that InvestingPro’s fair value calculations put Kraft Heinz upside at some 30% higher than where the stock is currently trading. The company’s forward price-to-earnings ratio currently comes to 12x, far cheaper than the average for its sector. And it has an over-100% two-year average return on both asset growth and common equity growth, towering over its peers.

The Oracle of Omaha has admitted that he initially overpaid for the stock years ago, but he’s firmly indicated that he’s in the food-and-beverage purveyor for the long haul. And analysts are on board: Notably, Stifel, Goldman Sachs, and UBS all have buy ratings on the stock, and analysts’ price targets average at about 25% above the current share price.

With all that, you also get a generous 4.6% dividend, so if you have the patience that Buffett is famous for, you’ll get paid while you wait for the shares to catch up with the company’s rich intrinsic value.

The stock is off 14% for the year.

Chevron

Chevron (NYSE: CVX ) is another big Buffett holding at 6.6% of his portfolio - although Berkshire did reduce its stake by some 20% in the first quarter - and the stock also comes in well under its fair value, per InvestingPro. The oil-and-gas giant has achieved an amazing 800% in cumulative EPS growth over the past three years, beating out virtually all its peers, as well as 900% and 1,000% two-year average returns on common equity growth and asset growth, respectively.

On top of that, Chevron has notched perfect InvestingPro scores for trends in revenue, EPS, and levered free cash flow. And it sports a very healthy cash flow to total debt ratio. Importantly, it has earned a “Great Performance” InvestingPro financial health score, which squares with Its perfect Piotroski Score - another reliable means of evaluating a company’s strength and potential for being a lucrative investment.

Buffett’s big stake in the company may also owe to Chevron’s massive share-repurchase program, which it just boosted by 17% to $17.5 billion earlier this year, making for a 4.2% buyback yield. As for its solid dividend, currently yielding at 3.9%, the company has hiked it annually for 35 years straight and has paid one every year since the early 1970s.

Beyond that, both InvestingPro’s fair value and analysts put share upside at 20% above current levels, and the stock has picked up a slew of upgrades over the past couple months, snagging buy ratings at several firms, including UBS and RBC Capital. And it trades at just a 11.5x P/E ratio.

Shares are off some 10% for the year.

HP

Buffett just established his HP (NYSE: HPQ ) position last year and enlarged the stake by 16% last quarter, bringing it to 1.1% of his holdings. That comes to 12% of HP’s outstanding shares.

Among HP’s more encouraging metrics, its return on capital comes in over 50%, better than the vast majority of companies in its sector, and it has recorded impressive average returns on assets over the past two and five years, beating out some 90% of its peers. HP has also delivered nearly a 100% total price return for the past three years.

Buffett’s interest may have been piqued in particular by the company’s dirt-cheap 8.9x P./E ratio and attractive 0.5x price-to-sales ratio. That’s not to mention its aggressive share buybacks, with some $13 billion worth repurchased as of the start of the year and making for a stunning buyback yield of 6.3%. Its dividend yield is an excellent 3.5%, with 52 straight years of payouts under its belt.

InvestingPro’s fair value metric also gives it plenty of upside.

While several analysts have a neutral rating on the stock, JPMorgan in particular sees strong long-term catalysts ahead, even amid shorter-term headwinds, and recently upgraded the shares to Overweight.

Shares are up some 13% year to date.

Kroger

Kroger (NYSE: KR ) comprises just under 1% of Buffett’s holdings, and its metrics provide a clue as to why he’s plunked so much money into the grocery store chain.

For one thing, Kroger has given investors consistently rising earnings per share, and it yields a lofty return on invested capital. Its rate of return on common equity also crushes others in its sector. Kroger outpaces peers on free cash flow yield and earnings yield, and ditto on its levered cumulative free cash flow growth over the past five years, which comes to some 300%.

In terms of valuation, Kroger shares trade at a 3x price-to-book ratio, making the stock cheaper on that metric than most any other company in the sector. Plus, its P/E ratio is an enticing 10.3x, and its P/S is an extraordinarily low 0.2x. In its note on a recent upgrade to Overweight, JPMorgan in part cited Kroger’s valuation, noting, “historically, it’s been fruitful to invest in KR when its multiple is this low.”

InvestingPro’s fair value calculation, moreover, puts Kroger’s estimated upside at a whopping 35% above where shares are currently trading.

Shares are up 4.2% for the year.

Data as of June 29, 2023.