The 2022 bear market hasn’t been very kind to Warren Buffett’s diversified holding company. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). Although Buffett and his team are top-notch stock collectors, 84% of the holding’s stock is currently in the red for the year. In fact, Berkshire Hathaway’s various stocks delivered a negative 14% average return on capital in about 10 months through 2022. This is a testament to the widespread impact of this bear market.
However, Berkshire Hathaway rarely misses out on stock purchases in the long run. Between 1964 and 2021, it delivered a staggering 3,641,613 percent total return on capital, and one of the main reasons it was able to do so was because Buffett maintained a laser-like focus on having high-quality companies with superior management. teams. So while this sour market isn’t gaining deep value right now, this key aspect of most Buffett stock purchases almost always shines through multi-year holding periods.
How can investors use this insight? Berkshire Hathaway’s two worst-performing stocks this year are the luxury furniture retailer. right (NYSE: Right) and cloud-based data platform developer Snowflake (NYSE: SNOW). The common theme of Berkshire Hathaway’s holdings is that they tend to be filled with deep values, and these Buffett stocks are no exception. That’s why they might be ready for epic comebacks in the not-too-distant future.
RH: “A Tale of Two Cities” stock
RH was Berkshire Hathaway’s worst performing stock to date, down 52.2% in 2022. But after this dramatic sell-off, the stock stands out as a tabletop buying opportunity for bargain hunters.
The main reason RH is making a huge counter buy right now is because its value proposition is currently being misunderstood by the broader market. While it’s true that RH’s core business in luxury home furnishings is somewhat sensitive to real estate market conditions, the company primarily targets high-net-worth clients who can pay cash for their homes or use collateral for low loans. interest loans.
So, even though RH’s top line is projected to drop by a notable 16% between 2022 and 2023, the market’s decision to hastily lower the stock’s forward price-earnings ratio by 62% relative to its 52-week stock is high — frankly ridiculous. After all, RH’s wealthy customers aren’t the ones most affected by inflation or rising interest rates.
The bottom line is that RH should continue to generate healthy levels of free cash flow, even as the broader economy gradually slows down over the next few quarters. Moreover, the company’s plans to expand into high-growth areas such as hotels, hospitality and international markets bode well for its long-term outlook.
Finally, Wall Street analysts’ current fair value estimates for relative humidity point to a significant upside potential of 49%. Now, analysts’ valuation scenarios should always be taken with a grain of salt. But in this case, there’s a compelling argument that this stock of luxury home goods has really gone down too far. Therefore, a comeback seems imminent.
Snowflake: A strong growth trend
Big tech companies are constantly switching to cloud services as a way to host and then retrieve large datasets. Montana-based cloud computing company Snowflake has been continuing this rising trend for the past 10 years. While it has yet to ditch truly competitive in this cramped space, its user-friendly platform is starting to reach a core customer base, resulting in a tremendous increase in recent sales.
For example, in its most recent quarter, Snowflake reached $497 million in sales, up 83% year-on-year. It’s on track to be cash flow positive consistently over the next few quarters. What’s more, Wall Street expects the top rank of cloud computing player to rise at a stunning 36.75% annual compound rate over the next three years. Yet this Buffett stock has lost an astonishing 47% of its value over 2022.
The Bears beat Snowflake this year for two reasons. For one, its shares were trading at over 90x sales earlier this year. High-valued technology stocks have been key targets for short-sells and profit-makers all year. In particular, Snowflake’s premium rating has been questioned over concerns that larger cloud-based computing operations could shrink profit margins and steal customers.
Second, Snowflake is still not consistently profitable, and this pessimistic market has no patience for money-losing trades.
All things considered, Snowflake’s stock appears to have been unfairly penalized by this risk-averse market. The company’s lightning-fast sales growth should start running to become a dominant player in the massive cloud-based computing space by the end of the decade. And this ultra-rapid growth profile is a key reason Wall Street analysts think Snowflake’s stock could be undervalued at a stunning 65% right now. So, once investor recession fears ease, this top cloud computing stock may roar back.
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George Budwell has no position in any of the aforementioned stocks. Motley Fool holds and recommends positions at Berkshire Hathaway (B shares), RH and Snowflake Inc. Motley Fool recommends the following options: $200 calls in Berkshire Hathaway (B shares) January 2023, short $200 calls in Berkshire Hathaway in January 2023 (B shares), and short January 2023, Berkshire Hathaway’ e (B shares) $265 call. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and may not necessarily reflect the views of Nasdaq, Inc.