The third quarter was another tough one for investors, with the U.S. stock market down 4%. So it’s not surprising that it was a somewhat busy quarter for Berkshire (BRK.A/BRK.B)’s investment team, which practiced what Warren Buffett has preached: “Be fearful when others are greedy, and greedy when others are fearful.” Morningstar strategist Greggory Warren, who covers Berkshire Hathaway, notes that Berkshire was a net purchaser of equities during the quarter.
3 Warren Buffett Stock Picks
These three stocks were among the several that Warren Buffett and his team purchased last quarter—and we think these stocks are undervalued today:
1) Taiwan Semiconductor (TSM)
2) Paramount Global (PARA)
3) RH (RH)
Here’s a little bit about why we like each of these stocks at these prices, along with some key metrics for each. All data is as of Nov. 18, 2022.
Taiwan Semiconductor Stock
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Semiconductors
The third-quarter Warren Buffett stock purchase that generated the most buzz was, hands down, Taiwan Semiconductor stock. The stock of the world’s largest dedicated contract chip manufacturer has struggled this year because of macroeconomic uncertainty, sluggish demand, and new U.S. restrictions on doing business with Chinese customers. That being said, Taiwan Semiconductor is a giant with significant competitive advantages, and we expect the company to be an outsize beneficiary in cloud services over the long term, says Morningstar analyst Phelix Lee.
More from Lee about TSMC’s wide economic moat:
“We believe TSMC’s wide moat stems from its cost advantage and intangible assets, which are realized from its leading position in process technology, or nodes. TSMC’s long-standing leadership in node advancement comes from its ability to correctly and consistently prioritize the right areas in which to innovate for nodes, while maintain fiscal discipline. Process technology leadership not only enables TSMC to improve power, (faster) performance, and (smaller) area, or PPA, cost per chip and time to market, which are critical for the competitiveness of computing devices, but also justifies higher prices than peers. As such, we believe that TSMC’s leading position in the advanced processes will contribute to attracting and retaining more customers, more stable utilization of ever-expanding production capacities and lower production costs, generating a higher return than its peers because of the cost advantage, and as a result, ensuring sufficient profits to fund research and development and capital expenditures on subsequent nodes. This virtuous cycle of intangible assets brought by heavy R&D and cost advantages brought by better PPA reinforce each other, preventing smaller peers catching up, in our view. In fact, TSMC has been leading nodes’ advancement and maintaining over 50% market share since the early 2000s, and its gross and operating margins have been at least twice as high as those of its closest peers for years.”
Although the stock rallied after word spread about Berkshire’s purchase, TSMC stock remains significantly undervalued relative to our fair value estimate. We think shares are worth US$133 apiece.
Paramount Global Stock
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Capital Allocation Rating: Standard
- Industry: Entertainment
Berkshire added to its existing position in Paramount Global stock last quarter. Paramount is the result of the reunion of CBS and Viacom. Earlier this month, the company reported a decline in ad revenue. A continued advertising slowdown along with cord-cutting, currency headwinds, and the loss of political ad revenue will be a drag on Paramount’s revenue in 2023, argues Morningstar senior analyst Neil Macker.
Here’s what Macker has to say about Paramount’s economic moat:
“Paramount’s competitive advantage lies in the CBS broadcast network, a valuable portfolio of cable networks with worldwide carriage, production studios, and a now deeper content library. The company owns one of four major national broadcast networks and affiliated TV stations in 16 markets. While network ratings have declined over the past two decades, the broadcast networks are the only outlet to reach almost all 120 million households in the U.S. Network ratings still outpace cable ratings and provide advertisers with one of the only remaining methods for reaching a large number of consumers. The network also provides an outlet for CBS Studios, which has generated multiple hit programs on an annual basis. CBS Studios currently produces or coproduces 80% of the prime-time slate on CBS, with 40% fully produced in house.
“CBS also has a strong portfolio of sport rights, including NFL, college football, and college basketball. Live sport is one of the few programming categories to remain largely immune to DVR/time-shifted viewing and continues to draw males aged 18-49, a key advertising demographic. In 2021, 61 of the 100 most watched telecasts among all viewers were sports, with NFL games making up eight of the top 10 and 39 overall in the key demo of viewers 18-49. We believe the combination of highly rated original programming and exclusive sports rights will allow CBS to continue to increase its revenue from retransmission fees and reverse compensation.”
We recently reduced our fair value estimate of the stock to US$45, but shares are trading significantly below that.
RH Stock
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: None
- Morningstar Capital Allocation Rating: Exemplary
- Industry: Specialty Retail (Luxury Furniture)
Berkshire added to its existing position in RH stock last quarter. RH is a luxury retailer operating in the domestic furniture and home furnishing industry. The company forecasts a sales decline this quarter caused by the pullback in consumer spending in the current economic climate. Despite near-term headwinds, we think RH’s long-term outlook is solid and that the company has a strong pipeline of luxury ideas, says Morningstar senior analyst Jaime Katz.
More from Katz on RH’s business:
“RH has gained share in the fragmented $118 billion (U.S. Census) domestic furniture and home furnishing market in recent years, curating differentiated offerings from specialized global artisans. The firm has broadened its brand awareness by expanding into underserved categories including modern, teen, and hospitality, where few peers have scale, helping capture incremental market share from boutique competitors. Brand equity should remain stable given the pace of tailored store buildouts, category expansions, and consistency of pricing, but the diverse end-market expansions RH is pursuing could make it difficult to capture a cost advantage. Entry into $200 billion hotel industry and $1.7 trillion domestic housing market should help support high-single-digit top-line growth over the longer term.
RH’s e-commerce business helps enhance brand awareness, with the ability to market incremental SKUs (bolstered by the World of RH platform launch). In past years, RH made operational and supply chain changes to improve its expenses, including adjusting its distribution center footprint and rightsizing the inventory base. We believe RH’s focus will be to strategically expand its global presence over the next decade via a wider set of luxury product offerings (guesthouse, yacht), alongside a multipronged gallery strategy set to suit local market demands.”
We assign RH stock a fair value estimate of US$383.
