If you’re looking for new investment ideas, you could do a lot worse than scour the holdings of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). A $1,000 investment in Berkshire Hathaway in 1965 — the year Buffett took over the reins of the once struggling textile mill — would have been worth $24.73 million at the end of 2018. Buffett grew the value of the company by either acquiring businesses outright or buying shares of great stocks — all done with a keen eye on value and letting time do its magic.
Buffett likes the high-flying retailer
Warren Buffett and Berkshire Hathaway’s vice chairman, Charlie Munger, have spoken highly of Amazon CEO Jeff Bezos in the last few years. Buffett has said that he missed the boat on Amazon, but according to Munger, it’s not too late. Earlier this year, Munger told CNBC that Amazon “is an utter phenomenon of nature” and that the company still has a long growth runway.
Indeed, Amazon continues to report robust growth rates even though it’s one of the largest companies in the world. The online retail giant increased revenue by 17% year over year in the first quarter. That is a deceleration from previous quarters but still an impressive growth rate for a company that generated $241 billion in sales over the last year.
Berkshire Hathaway owned 483,300 shares of Amazon as of March 31, 2019, which would be worth $834 million at current prices. However, it wasn’t Buffett, but one of the two investment managers who oversee a small portion of Berkshire’s equity portfolio who made the decision to buy Amazon stock. Buffett approves, stating that the decision was made with the same approach to value that the Oracle of Omaha has practiced throughout his career.
So how is Amazon a value trading at a trailing P/E of 72? For one, Amazon typically generates a lot more cash from operations than its reported earnings. Over the last year, the company generated $23 billion in free cash flow (FCF) compared with only $12 billion in net income. So the stock trades at a price-to-FCF ratio of 37 — not as expensive as its P/E would lead you to believe.
Second, Amazon Web Services is growing very fast, with sales soaring 41% year over year last quarter. More importantly, AWS made up 50% of the company’s operating income during the first quarter. Amazon also has a fast-growing advertising business included in its “other” sales category, in which sales grew 34% year over year in the first quarter.
At least two analysts in the last year have pointed out that investors are undervaluing Amazon’s core retail business after stripping out the value of AWS and advertising. It’s likely the value gurus at Berkshire Hathaway see the same value in Amazon and stepped up to the plate.
One of Buffett’s favorite bank stocks is on sale
It’s no secret that Buffett is a big fan of bank stocks. Berkshire owns several, including Wells Fargo, U.S. Bancorp, and M&T Bank, to name a few, with JPMorgan being the second largest bank holding for Berkshire. In the latest quarter, Berkshire Hathaway increased its stake in the stock, and now owns 59,514,932 shares of JPMorgan, worth about $6.5 billion at current prices…
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