When we think of Berkshire Hathaway (BRK.B) chairman Warren Buffett, “market underperformance” might not be the first phrase that comes to mind. However, the numbers tell a different story, as Berkshire stock is underperforming the S&P 500 Index ($SPX) in 2023.
That said, the stock has outperformed the index by almost 10 percentage points annually since its inception in 1965. Accounting for the impact of compound interest, which has been described by some investors as the “eighth wonder of the world," Berkshire Hathaway stock rose 3,787,464% from 1965 through 2022 as compared to the S&P 500’s 24,708% gain.
Looking at Berkshire Hathaway’s portfolio, some names – including the conglomerate’s top holding, Apple (AAPL) – have outperformed the markets in 2023. However, other Buffett picks are currently trailing the S&P 500 and are in the red despite the stock market rally. I believe Bank of America (BAC) and Chevron (CVX) are two such underperforming stocks that look like good buys now.
Inside Buffett's Top Bank Pick
Bank of America is Berkshire Hathaway’s second-largest holding, behind AAPL, and the conglomerate is BAC's biggest stockholder with its almost 13% stake. Incidentally, Buffett has long strived to limit Berkshire’s stake in banks below 10% to escape regulatory scrutiny. However, the Oracle of Omaha made an exception for Charlotte-based Bank of America.
Furthermore, BAC is the only existing bank holding where Berkshire added more shares over the last two years. During this same time frame, Buffett's flagship fund wound down stakes in Bank of New York Mellon (BK), U.S. Bancorp (USB), Wells Fargo (WFC), JPMorgan Chase (JPM), and Goldman Sachs (GS). Citigroup is the only new bank stock that Buffett has added over the last 2 years, and with a yield of over 4%, it looks like an attractive dividend play.
As for Bank of America, the stock is down 2.1% this year and is underperforming not only the broader markets - but also its big-cap banking peers like JPMorgan Chase and Wells Fargo.
Bank of America posted better-than-expected earnings of $0.88 per share in the second quarter of 2023 and its revenues came in at $25.33 billion – which was ahead of the $25.05 billion that analysts expected.
Why BAC Is a Strong Underperforming Buffett Stock to Buy
After the recent underperformance, BAC looks like a good undervalued stock to buy. It currently trades at a forward PE multiple of 10.14x, which is below the five-year average of 11.61x. Plus, I believe that the wider banking sector is due for a valuation reset as the larger U.S. banks emerged largely unscathed from the regional banking crisis.
Wall Street analysts currently rate Bank of America's stock as a Moderate Buy:
Of the 19 analysts covering BAC, 9 rate it as a Strong Buy while one a Moderate Buy. Seven analysts rate it as a Hold while one each rates it as a Moderate Sell and Strong Sell.
BAC has a mean target price of $35.61 - a premium of 9.8% over current levels - while its Street-high target price of $52 implies upside potential of over 60%.
Bank of America’s dividend yield is just under 3%, and after the recent underperformance, I believe it looks like a decent buy at these price levels.
Berkshire Hathaway Holds a 7.1% Stake in Chevron
Over the last year, Warren Buffett opened up Berkshire’s coffers to build massive stakes in energy companies – namely, Chevron and Occidental Petroleum (OXY). Chevron is now Berkshire’s fifth largest holding, and its 7.1% stake is worth more than $21 billion.
The energy sector’s fortunes have whipsawed over the last few quarters. While energy was the best-performing S&P 500 subsector in 2022, the group has lagged in 2023 as oil and gas prices retreated from their highs - as reflected in the price action of the US Oil Fund (USO), below. Now, Chevron stock is down over 10% for the year and is among the bottom 100 S&P 500 stocks.
Why Chevron Looks Like a Good Buffett Stock to Buy
Following its pullback, Chevron trades at a forward enterprise value-to-EBITDA multiple of 5.73x, which looks reasonable - and with a healthy dividend yield of 3.7%, I find it an attractive Buffett stock to buy.
Wall Street analysts have a Moderate Buy rating on Chevron stock:
Of the 18 analysts covering CVX, 8 rate it as a Strong Buy and 2 as Moderate Buy. The remaining 8 analysts rate the energy giant as a Hold. The stock’s mean target price of $188.33 is a premium of 16.7% over current prices.
Oil and Gas Prices Should Rebound
From a fundamental perspective, I believe energy prices should rebound in the medium term. First, China has vowed to support its sagging economy, and a rebound in growth for this key industrial nation should help propel energy prices higher.
Second, the U.S. economy has proven to be far more resilient than many expected. Despite the Fed hiking interest rates to their highest level since 2001, the U.S. economy hasn’t entered into a recession, as was widely predicted, and a “soft landing” now looks the most likely scenario for the world’s largest economy.
Finally, the price action of commodities, has diverged from stocks over the last six months, suggesting investors have priced in a fairly bleak economic outlook for energy demand. As the Fed approaches the likely end of its rate-hike cycle, we might see a rebound in oil as these commodities catch up to the gains in equities - with major sector players like CVX among those set to benefit.
On the date of publication, Mohit Oberoi had a position in: BRK.B , AAPL , C , SPY . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
