3 Warren Buffett stocks to buy on hand in May

If Warren Buffett has proven anything in his 57-year tenure as Berkshire Hathaway (BRK.A -2.94%)(BRK.B -2.55%) CEO is the power of patience. Although he doesn’t use fancy charting tools or research the hottest stock tips or growth trends, Buffett has overseen the creation of more than $730 billion in shareholder value. (himself included) and generated an aggregate return on Berkshire Class A Shares (BRK.A) of over 4,000,000%!

Although the Oracle of Omaha, as it is now known, will not always be right, following its path has more often than not become a lucrative proposition for individual investors and Wall Street professionals. So when stock market corrections hit, it pays to go hunting for bargains in the Berkshire Hathaway portfolio.

Warren Buffett, CEO of Berkshire Hathaway. Image source: The Motley Fool.

As we move forward into May, the following three Buffett stocks are on sale and just waiting to be bought by opportunistic investors.

Bank of America

The first Warren Buffett stock investor who can buy with confidence in this latest market pullback is the money center giant Bank of America (BAC -3.07%). BofA is Berkshire Hathaway’s second largest holding and represents 11.2% of its invested assets.

The big concern for bank stocks, and the reason the financial sector has taken it on the chin in recent weeks, is the growing likelihood of a recession in the United States. Last week, the US Department of Commerce reported a 1.4% drop in gross domestic product (GDP) in the first quarter. Rapidly rising inflation, coupled with a hawkish shift by the Fed, could dampen economic growth. For banks, this means fewer loans and the potential for higher loan losses and/or defaults.

However, the Bank of America that was a seemingly overleveraged mess in the late 2000s is long gone. What you see today is a well-capitalized bank with a financially prudent management team that is keen to reward shareholders with a hearty return of capital program.

The biggest catalyst working in favor of BofA is the central bank becoming hawkish. No monetary central bank is more sensitive to changes in the yield curve than Bank of America. As the Fed raises rates, BofA will see a dramatic increase in net interest income from outstanding floating rate loans. According to the company, a parallel shift of 100 basis points in the yield curve should generate an additional $5.4 billion in net interest income over 12 months. It’s not pocket change!

Bank of America is also benefiting from its digitization push. By the end of March, it had 42 million active digital banking users and recorded 53% of total sales made online or through a mobile app. This represents an increase from only 30% of all sales made digitally in the comparable quarter three years ago. Since digital transactions are much less expensive than face-to-face and telephone interactions, this digital shift has allowed BofA to consolidate some of its branches and reduce operating expenses.

And, as noted, CEO Brian Moynihan has a rich history of rewarding shareholders via dividends and buybacks (with Fed approval).

Bank of America shares are currently only 9 times Wall Street’s forecast earnings for 2023 and have a reasonably low 24% premium to book value. There seems to be a lot of upside for patient investors.

A red 2024 Chevrolet Equinox being driven down a city street.

The 2024 Chevy Equinox EV will start around $30,000. Image source: General Motors.

General Engines

Warren Buffett’s second stock to buy hand in hand in May is a company that’s been on this list for months in a row: the automaker General Engines (GM -2.17%).

Auto stocks like GM are currently facing a triple whammy. First, they face historic supply chain challenges, including a shortage of semiconductor chips used in next-generation vehicles. Second, the COVID-zero strategy employed by China is creating significant retail supply and demand disruptions in the world’s largest automotive market. And third, historically high inflation and the aforementioned growing prospect of a recession could temper demand for auto loans and new vehicle purchases.

Despite all these concerns, General Motors appears poised to capitalize on decades-long growth spurred by the electrification of consumer vehicles and business fleets.

General Motors last year bolstered its commitment to cleaner vehicles by pledging $35 billion in overall spending on electric vehicles (EVs), autonomous vehicles and battery research through the end of 2025. According to CEO Mary Barra, GM plans to launch 30 new EVs. globally by the end of 2025, with the goal of producing more than one million electric vehicles per year in North America by the middle of the decade. The company is also expected to have two battery factories operational by next year.

Early indications suggest that demand for electric vehicles is strong. Following the release of GM’s first quarter results, Barra’s letter to shareholders indicated more than 140,000 reservations for the 2024 Chevy Silverado EV, which will enter production in 2023. The company’s Chevy Equinox EV also plans to dangle the value carrot to buyers with a price tag starting around $30,000.

Despite China’s recent woes, there’s plenty of EV market share up for grabs in the world’s biggest auto market. Although China’s COVID-19 policies may lead to lower deliveries in 2022, GM has delivered 2.9 million vehicles to China in consecutive years. In other words, it has the brand image and the deep pockets to become a major player in electric vehicles.

While the company sticks to its full-year guidance, investors have the option to buy GM stock for less than 6 times projected earnings. Even for the cyclical auto industry, it’s incredibly cheap and a godsend for long-term investors.

A person accessing the US Bank digital app on their smartphone.

Image source: US bank.

American bank

The third Warren Buffett stock investors can buy in May is the long-time holding of Berkshire American bank (USB -2.96%). Yes, another banking stocks!

The concerns I outlined above with BofA are true for US Bancorp, which is a regional banking giant. The growing prospect of a recession in the United States, which was not helped by a negative impression of GDP in the first quarter, could lead to an increase in write-offs and defaults on loans. Since bank stocks are cyclical, they tend to perform poorly during recessions.

However, there is another side to this coin. Although recessions are an inevitable part of the business cycle, they only last a few months or quarters. In comparison, periods of economic expansion are known to last for years. Bank stocks like US Bancorp (the parent company of US Bank) give long-term investors the opportunity to take advantage of these long periods of economic expansion.

One of the things that makes US Bancorp so attractive is its fiscal discipline. While most big banks sought out riskier derivative investments during the financial crisis more than a decade ago, US Bancorp was mostly content with the bread and butter of banking: loan and deposit growth. Avoiding riskier investments allows it to generate higher asset returns than its peers, as well as rebound faster from recessions.

Also, if you thought BofA was doing a great job focusing on digital banking, you should take a closer look at US Bancorp. Between the start of 2020 and the start of 2022, the percentage of loan sales made digitally increased from 45% to 65%. Additionally, the total number of transactions conducted digitally jumped 10 percentage points over this period to 82%. With such a digital commitment, US Bancorp has been able to consolidate its branches and reduce operating expenses.

Perhaps most exciting of all, US Bancorp hasn’t been this cheap in at least 10 years, based on Wall Street’s earnings forecast for the year. A stock can be bought now for a multiple of 9.4 times next year’s projected earnings. It’s an incredible bargain for a bank stock that continually delivers to its shareholders.

About Miley Sawngett

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