CB - 3 Battered Stocks That Even Warren Buffett Could Be Eyeing
2024-05-28 05:34:57 ET
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One of many ways legendary investor Warren Buffett has achieved great wealth is buying blue chip stocks when they are beaten down for the portfolio of Berkshire Hathaway (NYSE: BRK-A , BRK-B ), the conglomerate he founded and heads. Buffett likes to invest in industry leaders in sectors he understands. He was leery of tech stocks and it took him a long time to load up on Apple (NASDAQ: AAPL ), now it is his biggest holding. His portfolio reflects this outlook with another large position being Coca-Cola (NYSE: KO ).
A large economic moat is also found in many Warren Buffett stocks. This is what protects the business from the forces of competition and time. For Coca-Cola in large part, it is the brand and all that it entails. For the railroad holdings of Buffett, it is the sprawling infrastructure that comes with a major player in the transportation sector.
The wide and deep insurance holdings of Buffett show his appreciation for the time value of money. For this, you want someone to pay you as far in advance as far as possible so you can “play the float” and profit. The most recent Buffett investment was Chubb (NYSE: CB ), the insurance giant. Due to seeking to be on the profit-making side of the float, there are many other insurance companies in the portfolio and even Blue Chip Stamps, an early loyalty program that kicked off cash. Many times the money is free as it is never cashed in for the item.
Boeing ( BA )
Boeing (NYSE: BA ) has a wide economic moat in an industry America invented and dominates. It functions in basically a duopoly with only Airbus (OTCSMKTS: EADSY ), the European multinational aerospace firm.
The allure of the aviation industry is easily understood. Just look up! What is difficult for many to fathom is Boeing’s decline. Aerospace consultant Dr. Mike Heil, who headed the Ohio Aerospace Institute, told InvestorPlace , “Boeing’s long and unfortunate decline began when their emphasis shifted from engineering and product excellence to their stock price and short term financial performance. The bean counters took over, moved the headquarters away from their engineers, and started outsourcing manufacturing and engineering to cut costs. The dire results were predictable.”
With all respect to Elon Musk and The Boring Company , his tunneling outfit, air travel will dominate the future. That makes the present decline in the stock price of Boeing is an opportunity.
Boeing also goes nicely with Buffett’s investments in NetJets and railroads. NetJets is a private jet company for high-end travelers. Railroads haul bulk. Passengers and light cargo fly on Boeing planes.
Southwest Airlines (LUV)
Traditionally, Southwest Airlines (NYSE: LUV ) was the dominant airline. It carried the most domestic passengers and never lost money. Southwest is the only legacy carrier to never go bankrupt and has always posted a profit. A big reason for this is Southwest only flies the Boeing 737. As a result it is more efficient and kicks off more cash. But it also suffers when Boeing is hurting, as it is presently. When Boeing recovers things will be much better for Southwest Airlines, too!
Southwest also fits in with NetJets and the railroads. NetJets fly affluent passengers. Southwest is a discount airlines. Railroads carry freight and Southwest carries passengers seeking a fare cheaper than NetJets.
Airlines also offer float income. Southwest sells tickets for travel a year into the future. So if you book a flight for April 2025 and pay for it today, there is almost a year of free money before having to provide the service for the payment. In addition, if Buffett were to invest in Southwest and Boeing he could work to keep Boeing as the only plane in the fleet. This would protect two of his potential investments!
Southwest took a major step recently to bring in more passengers. Previously tickets had to be bought through its website. Flights will now be displayed on Google Flight , the travel sales arm of Alphabet (NASDAQ: GOOG , GOOGL ). Obviously something was working before as Southwest was the leader in domestic passengers carried. Still, this is a step in the right direction of turning things around for the airline.
Starbucks (SBUX)
Starbucks (NASDAQ: SBUX ) is more than just coffee. One meme says “Starbucks is a bank dressed up as a coffee shop” due to its loyalty program’s success. Starbucks Rewards has 34 million members who load or reload $10 billion annually. These numbers are increasing. This is very attractive to Buffett. Starbucks gets the money, plays the float, books investment income and delivers the goods and services later.
Until it is spent, this would be more free money for Buffett to invest. Up to one-fifth of gift cards remain unspent and more than 5% is never used . So if $10 billion goes on Starbucks Rewards Apps yearly and 5% is never spent, the house nets $50 million annually just from those funds never used.
Buffett was, at one time, one of the largest sharehlders of RJR , the cigarette maker due to the brand loyalty. He should similarly love the brand loyalty Starbucks creates for a more appealing consumer good with a high profit margin.
Big Coffee could easily team up with other Buffett consumer holdings, too. Starbucks could sell Sees Candies , one of Buffet’s favorite assets, in the way McDonald’s (NYSE: MCD ) is bringing in Krispy Kreme (NASDAQ: DNUT ) pastries to fill a hole in its breakfast lineup. Other possibilities include Dairy Queen or Kraft Heinz (NASDAQ: KHC ).
The combination could serve up tasty returns for Buffett’s portfolio!
Disclosure: On the date of publication, Jonathan Yates did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .
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