Profit companies

3 Buffett stocks that can ride through this messy market

It’s scary these days. When you consider high inflation, increasing layoffs, stocks in a bear market and an uncertain economic outlook, it makes sense for investors to be worried. Still, if there’s one upside to a bear market, it’s that the scarier things look, the more likely the market is to serve big companies with superb long-term resistance at reasonable prices.

At times like these, it’s a good idea to consider what Warren Buffett, one of the great investors of all time, would invest in during this tough time. With that in mind, we asked three investors to name Buffett stocks that can navigate today’s messy market. They have chosen Apple (AAPL 1.15%), (AMZN 2.47%)and that of Buffett Berkshire Hathaway (BRK.A -0.20%)(BRK.B -0.18%).

Read on to find out their thinking behind these choices. Then decide for yourself if any of these Buffett stocks deserve a place in your own portfolio.

Image source: The Motley Fool

Such juicy potential!

Eric Volkman (Apple): Tech stocks are hardly the stock market asset of choice for investors right now, but a weakened stock price makes me believe in one of the biggest in the industry even more: Apple. Buffett is also a big supporter of Apple. He is now a major shareholder in the company through Berkshire Hathaway. In fact, Apple now accounts for almost 40% of the company’s stock portfolio.

Yes, Apple has had its struggles lately, especially with the supply chain issues faced by almost every other company that makes a product. But look at how the company has performed and how it is relentlessly positioning itself for continued growth. Looking at the recent past, from fiscal year 2017 to 2021, the company has managed to grow revenue by 60% and post net profit margins that have consistently landed in the low to mid 20% range.

Although the iPhone product line is over 15 years old, it retains a strong market share and continues to build its premium cachet. As such, it is a great anchor product for the business. Zooming out a bit, sales increase sharply along with other revenue streams, including services.

Meanwhile, new (rather) businesses for Apple, such as the M1 line of computer chips and financial services centered on its MasterCard– Branded credit card, very promising to expand the top line even further. Given these high profit margins, this should also significantly increase the company’s bottom line.

Analysts are as confident as I am that Apple’s fundamentals will continue to soar. Collectively, for this exercise, they model a 9% year-over-year improvement in net earnings per share thanks to an 8% increase in revenue. While these numbers drop to 7% and 6% respectively for 2023, this is still impressive given the maturity of the company and the competitiveness of most of its product lines.

I’m willing to bet that Buffett stays the course with Apple or (as he has done before) adds to Berkshire’s already massive stake. Everyone else must either hold on or get on the train.

Amazon’s share price decline is an opportunity for investors

Parkev Tatevosian (Amazon): One of my favorite Warren Buffett stocks during this messy market is Amazon. The e-commerce giant has become an all-purpose store that also generates strong revenue streams outside of online sales. Its Amazon Web Services (AWS) segment, in particular, is poised to remain resilient even amid market turbulence.

In its most recent quarter, AWS grew revenue by 37%. That was more than the 32% it had risen in the same quarter the year before. The increase means it now accounts for 16% of Amazon’s overall revenue, up from just 13% in the same quarter last year. This is crucial as the segment posted an operating profit margin of 35.3% in its quarter ended in March.

Longer term, the growth of higher-profit business opportunities has driven Amazon’s operating profit margin from 2.1% to 5.3% from 2015 to 2021. For this reason, AWS’s trend to increase its share of overall revenue is great news for Amazon’s earnings in the long run.

AMZN PE Ratio Chart

AMZN PE Ratio data by YCharts.

To be sure, Amazon’s online sales may struggle as consumers move their shopping habits closer to pre-pandemic levels, which means more physical travel. However, investor concerns over the reversal caused Amazon’s share price to fall 43% from its highs. The drop created an opportunity for investors to buy Amazon shares at a price-earnings ratio of 52, which is near a five-year low.

In these volatile market conditions with high uncertainty, it’s good to consider resilient companies like Amazon that can weather the storm.

A business built for tough times

Chuck Saletta (Berkshire Hathaway): There are few companies as well positioned as Berkshire Hathaway, which is led by Warren Buffett, for the dire combination of high inflation and a weak economy we face today. Its core insurance business incorporates a kind of natural hedge against inflation. After all, as asset prices rise due to inflation, so does insurable interest, and hence the justification for higher premiums.

In addition to this natural hedge, consider the wholly owned subsidiaries of Berkshire Hathaway. This list is full of companies related to food, transport, energy, clothing and housing. These types of businesses can maintain a certain level of demand even in the worst economic conditions. After all, you have to eat, live somewhere, stay dressed and avoid freezing, and get the basics from point A to point B no matter what.

As if that weren’t enough, Berkshire Hathaway’s balance sheet is generally considered a fortress, with the company often chastised for carrying too much money. Although cash is a bit of a problem in times of inflation, it’s important to understand why Berkshire Hathaway has so much of it. Usually that’s because his insurance business and subsidiaries generate a lot of it, and Buffett usually only wants to invest that excess cash when he sees a good deal.

This combination adds up to a company that is built to weather some really tough times and come out stronger on the other side. Indeed, it was this very structure that allowed Buffett to provide himself with bailout financing on favorable terms during the financial crisis.

When the future is as uncertain as it seems today, I’m not sure there are any companies better suited than Berkshire Hathaway for what comes next.

Strong companies make it easier to invest in tough times

Although Apple, Amazon and Berkshire Hathaway generally operate in different parts of the economy, they all have great qualities that have attracted Warren Buffett, one of the world’s greatest long-term investors. It’s never easy to invest when times are as tough as they are today, but with great companies like these, it may be possible to stay invested for a better tomorrow.