Wall Street legend Warren Buffett has always been a proponent of value investing. The Oracle of Omaha’s decades of almost unprecedented success were built on recognizing when a stock is priced significantly below its intrinsic value and then betting big on it. Praising the merits of patience and the long-term effect of compound returns, Buffett is a master of his profession.
However, even the portfolios of the most successful investors include stocks that experience downturns. It’s probably fair to say that during those times Buffett, known for his sage advice to “be greedy when others are afraid,” might make plans to increase his holdings if he is convinced that a certain stock will eventually recover.
With that in mind, we used TipRanks’ database to locate a pair of stocks in Buffett’s portfolio that have underperformed this year. The stakes are not low; True to form, he has multi-billion dollar stakes in both and has been a shareholder in each for over 5 years. Let’s see what Wall Street stock market experts think now.
Kraft Heinz (KHC)
First on Buffett’s underperforming list is consumer goods sector stalwart, Kraft Heinz; one of the largest food and beverage companies in North America and owner of popular brands such as Philadelphia cream cheese, Jell-O and Velveeta.
While food and drink are essential, Kraft stock has significantly underperformed in recent months: KHC is down 15% year to date. This didn’t phase Buffett, nor did it cause him to reduce his stock holdings. The billionaire investing legend has been a KHC shareholder since 2015 and his company currently holds 325,634,818 shares worth $10.89 billion. The size of the stake makes Berkshire the largest owner of Kraft Heinz.
Kraft Heinz boasts 8 brands generating over $1 billion annually and has a global reputation as a trusted supplier of foods and beverages that people love to eat. The company generated about $26 billion in total revenue last year and saw both revenue and earnings show year-over-year increases in its latest financial report, from 2Q23.
That said, while Kraft’s second-quarter revenue came in at $6.72 billion, up 2.55% y/y, it missed forecasts by $81.9 million, with the company noted a sharp decline of 7% in volume. Bottom line, the company’s EPS of 79 cents compared favorably to the year-ago quarter’s figure of 70 cents and was 3 cents per share better than expected.
Buffett has always liked dividend stocks, prioritizing high-yielding dividend payers to generate strong passive income from his holdings. KHC will pay a common stock dividend of 40 cents per share on September 29. The annualized dividend is $1.60 per share and yields 4.74%. Kraft’s dividend has been held at its current level since 2019.
Moving on to Street analysts, we find Deutsche Bank’s Stephen Powers taking a bullish stance on Kraft Hienz. Powers notes the industry’s struggles, but believes the company is fundamentally strong.
“While we recognize and understand the recent negative sentiment on packaged food inventories due to (i) skepticism about demand/volume recovery, (ii) potential retailer price reaction, and (iii) risks of declining trade or an intensification of competitive dynamics, we remain constructive on KHC’s improved fundamentals (i.e., structurally stronger portfolio, clearer growth/business strategy, expansion opportunities in foodservice and emerging markets, healthier levels of reinvestment spending compared to pre-pandemic, improved capabilities across the company, better management execution, etc.) and supportive ratings. Therefore, we maintain the Buy rating,” Powers said.
The Buy rating is supported by a $47 price target that points toward 40% stock appreciation over the next year. (To watch Powers’ track record, click here)
Overall, KHC stock gets a Moderate Buy rating from the Street analyst consensus, based on 15 recent reviews that break down into 5 Buys and 10 Holds. The shares are trading at $33.45 and their average price target of $40.47 implies an upside potential of approximately 21% over the next 12 months. (See KHC Stock Predictions)
Bank of America Corporation (BAC)
The second stock on our list, Bank of America, is a major name in the global banking industry and, with total assets of $3.12 trillion, is one of the largest banking companies in the world.
That said, BAC shares are down about 11% this year, even as the S&P 500 Index has posted a net gain of 16%. The decline in the stock price hasn’t stopped Berkshire Hathaway from maintaining a large stake in BAC; the firm owns about 1.033 billion shares of the bank, which make up 8.5% of Berkshire’s portfolio. Buffet’s stake in BAC is valued at more than $29 billion, and Berkshire Hathaway is Bank of America’s largest single shareholder, owning nearly 13% of outstanding shares.
Bank of America has a wide-ranging business, in both consumer and commercial accounts, small- and medium-sized business banking, and large-scale institutional banking. According to the 2Q23 financial release, the bank’s total revenue grew 11% Y/Y to $25.2 billion, beating estimates of $258.8 million. This supported net income of $7.4 billion, up 19% y/y, with EPS of 88 cents beating forecasts by 4 cents per share. Bank of America ended the second quarter with $373.5 million in total cash and liquid assets, compared to just $198 million at the end of 2Q22.
This banking company is known for its strong capital return policy and in the second quarter the bank returned $2.3 billion to its shareholders through share repurchases and dividends. The stock’s dividend was last declared on July 19, with payment on September 29 at 24 cents per common share, marking a 9% increase from the previous quarter. The annualized dividend is 96 cents per share and yields 3.3%.
While Bank of America’s strong dividend history must be attractive to Buffett, based on his long-stated preferences, Well Fargo analyst Mike Mayo takes a different tack. He is impressed by the size of BAC and sees the gigantism of the bank as an overall positive aspect, an advantage that cannot be denied.
“In our view, Bank of America is among the best-positioned large-cap banks with respect to deposits (especially consumer deposits), cost management, credit quality and reputation as a leader in stakeholder capitalism. Additionally, BAC is a technology leader among banks, which should help it further grow its leading deposit share toward its goal of a quarter in the U.S. and aid it in its effort to show superior operating leverage. In fact, its technological advantages should help BAC show best-in-class revenue to expense growth in 2023, leading to higher incremental profit margins for the Consumer Bank. Overall, BAC is a Goliath at a time when Goliath is winning,” Mayo said.
Mayo goes on to give the stock an Overweight (i.e. Buy) rating, and his $40 price target indicates confidence in a 39% gain on the one-year horizon. (To see Mayo’s track record, click here)
Overall, BAC boasts a Moderate Buy consensus rating based on 16 recent analyst reviews, including 8 Buys, 6 Holds, and 2 Sells. The $28.84 trade price and $35.13 average price target combine to suggest approximately 22% one-year upside potential. (See BAC Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.