Berkshire Hathaway CEO Warren Buffett is one of the most successful value investors of all time. By picking stocks that trade at deep discounts to their intrinsic value, Berkshire Hathaway has consistently beaten the broader market during his long tenure as the company’s leading stock picker.
Although classic value stocks fell out of favor during the nearly decade-long bull market during the 2010-2020 period, and Berkshire stocks underperformed some of the major US equity indices as a result, these proven investment vehicles are making a furious comeback during this period. current bear market. In short, the growing likelihood of rising interest rates and stubbornly high levels of inflation should favor Buffett’s value investing approach over narrative-driven growth stocks in 2022.
Which stocks of Berkshire Hathaway — or Warren Buffett — are the best value stocks right now? Bank of America (BAC 3.26% ) and Teva Pharmaceutical Industries ( SUITS YOU 5.42% ) are currently trading at attractive valuations. Here’s a quick look at why these two Buffett stocks could be primed for a big year in 2022.
Bank of America: Rising rates are positive for banks
Bank of America shares are up 833% over the past 10 years. The bank’s share price has soared under CEO Brian Moynihan due to its strong focus on cost savings and improving asset quality.
Despite historically low interest rates and modest profit margins during his tenure as CEO, for example, Bank of America was able to boost earnings through a combination of cost-cutting measures, development of new technologies innovative and with a strong focus on lending primarily to low-risk borrowers. Bank of America, as a result, slowly transformed itself into one of the world’s best-run financial institutions over the previous decade. It’s a stunning turnaround considering the company’s situation immediately after the financial crisis of 2008 to 2009.
The best part of this story, however, is that the ongoing bull run in Bank of American stocks will likely only accelerate when the Federal Reserve raises rates in 2022. In a nutshell, higher interest rates high generally means higher profit margins for banks, and therefore higher net income. Consistent with that theme, Wall Street thinks Bank of America’s annual revenue growth could jump 17% next year, largely due to higher interest rates. And if that line holds true, the bank’s shares would be trading at less than 11 times forward earnings right now. In short, Bank of America shares could be very cheap right now.
Teva: A turnaround is inevitable
Generic and brand-name drug giant Teva Pharmaceuticals is definitely a contrarian choice. The drugmaker’s ongoing litigation over the U.S. opioid epidemic, its lack of clear medicine at the franchise level, and the huge debt levels from its acquisition of Actavis a few years ago have driven its shares down 76% over the past eight years. However, Teva seems to be firmly on the comeback trail.
At this point, Teva should be able to settle these opioid lawsuits relatively quickly, and it has reduced its outstanding debt by more than $12 billion since 2017. In addition, the drugmaker is offering a framework of new growth products, such as Huntington’s disease drug Austedo and migraine drug Ajovy, which is expected to return it to respectable levels of revenue growth by mid-decade.
What is the most fascinating aspect of Teva’s story? Shares of the pharmaceutical company are currently trading at just three times forward-looking earnings. That’s well below the industry average, implying that the market has become far too pessimistic about the drugmaker’s near-term prospects. All told, Teva seems poised to put these various headwinds behind it, making its stock a crying buy at these advantageous basement levels.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.