If you’ve ever wondered why Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett attracts about 40,000 investors to his company’s shareholders’ meeting each year, so look no further than his track record. Since taking over as CEO in the mid-1960s, the “Oracle of Omaha” has overseen a return of nearly 4,964,000% for his company’s Class A shares (BRK.A), which compares quite favorably to the total return of about 36,000%, including dividends paid, for the general population. S&P 500 over the same period.
For nearly six decades, Buffett and his blue-chip investment team have had a knack for spotting tried-and-true bargains that were hiding in plain sight.
Currently, Berkshire has stakes in 44 stocks and two exchange-traded funds representing $388 billion in invested assets. But among those are three Warren Buffett stocks that represent spectacular buys for the second half of 2024, and likely well beyond.
Amazon
The first Warren Buffett stock that stands out for all the right reasons for the second half of 2024 and GOOD beyond is Leader in e-commerce Amazon (NASDAQ: AMZN).
Amazon’s problem has always been its relatively “expensive” valuation, at least when using traditional fundamental metrics, such as the price-to-earnings (P/E) ratio. Although the proven P/E ratio works very well when trying to value mature companies, this essential metric tends not to be effective when analyzing fast-growing companies that regularly reinvest their cash flow into their operations .
Chances are you’re familiar with Amazon because of its superior e-commerce platform. By 2023, Amazon is estimated to have captured nearly 38% of U.S. online retail sales. While this would, in theory, expose the company to weakness if the U.S. or global economy fell into a recession, the important thing to recognize about Amazon is that its operating cash flow and revenue come almost exclusively from its faster-growing ancillary operations.
For investors, nothing is more important than Amazon Web Services (AWS). AWS is the world’s leading cloud infrastructure services platform and recently surpassed $100 billion in annualized sales. What’s remarkable about this psychological annualized revenue milestone is that companies are still in the early stages of increasing their spending on cloud services. Because margins for cloud services are considerably juicier than those associated with online retail sales, AWS is typically responsible for 50% to 100% of Amazon’s operating profit.
Beyond AWS, Amazon also relies on advertising and subscription services to do the heavy lifting. Amazon attracts about 2.5 billion unique visitors to its site each month, which is more than enough to attract advertisers.
Meanwhile, the company surpassed 200 million Prime subscribers worldwide in April 2021 and likely increased that total as its content library and e-commerce platform grew. Like AWS, its advertising and subscription services are delivering sustained double-digit sales growth.
Despite recently hitting a new all-time high, Amazon is historically cheap relative to cash flow projections. Throughout the 2010s, investors routinely paid 23 to 37 times year-end cash flows to own Amazon stock. You can buy shares now for about 13 times the estimated cash flow per share in 2025.
Chevron
A second obvious Warren Buffett stock just waiting to be bought for the second half of 2024 (and beyond) is the global energy giant. Chevron (NYSE: CVX).
The biggest hurdle facing current and potential Chevron shareholders is the prospect of a looming recession in the United States or abroad. Oil and gas inventories tend to fluctuate with the spot price of crude oil and natural gas. In times of economic weakness, it is not uncommon for commodity-focused companies to struggle.
The good news for Chevron is that macroeconomic factors are working decisively in its favor. Even with some predictive indicators warning of a coming recession—for example, the first decline in the U.S. M2 money supply since the Great Depression—the U.S. economy has remained resilient.
To add to this point, the unprecedented demand uncertainty associated with the COVID-19 pandemic has led global energy majors (including Chevron) to cut capital expenditures (capex) for a good three years. Even with the recovery in capex, global crude oil supply has remained tight. When supply of a high-demand commodity is tight, it tends to have a positive effect on the spot price of that commodity. In simpler terms, it supports the price of oil, which generates more operating cash flow for Chevron’s drilling segment.
Perhaps one of the key catalysts for the second half of 2024 and into 2025 is the pending Chevron acquisition deal. Hesse In an all-stock deal valued at $53 billion, Chevron will invest 170,000 hectares in the oil-rich Bakken shale deposits and significantly increase its oil exposure in Guyana. If the price of oil remains high, this transaction will be even more interesting.
Even though it is in drilling that Chevron achieves its best margins, we must not forget that it is also an integrated operator. The company’s transmission pipelines, refineries and chemical plants serve as a hedge against a decline in the spot price of crude oil. Stable operating cash flow from these ancillary operating segments has played a key role in Chevron’s ability to increase its base annual dividend for 37 consecutive years.
The cherry on top is that Chevron shares are also historically cheap. Shares can be had right now for less than 11 times next year’s earnings, which is a 23% discount to its average annual multiple over the past five years.
Coca-Cola
Warren Buffett’s third stock that is a must-buy for the second half of 2024, and likely well beyond, is beverage giant Coca-Cola (NYSE: KO).
While an economic slowdown is arguably the biggest enemy for Amazon and Chevron, the prospect of above-average inflation is generally considered the biggest headwind for consumer staples companies. When the price of goods and services increases at a higher-than-average rate, there is always a fear that consumers will be forced to cut back on their spending.
The good news for Coca-Cola is that it offers a basic necessity product. Regardless of what happens in the U.S. economy or Wall Street, consumers will continue to buy beverages. Given the company’s strong brand image, Coca-Cola rarely has trouble raising prices to offset rising expenses.
Speaking of strong branding, Coca-Cola was named consumers’ “Most Chosen Brand” for the 12th consecutive year in Kantar’s latest Brand Footprint report. This dominance is a reflection of Coca-Cola’s high-profile marketing campaign, which involves the use of digital channels and artificial intelligence (AI) to reach younger audiences, while leveraging more a century of history and on well-known brand ambassadors to connect with its mature consumers.
Operationally, Coca-Cola is operating at full capacity. Even though growth isn’t the same as before, the company has what it takes to deliver consistent single-digit sales and profit growth. It has more than twenty brands generating at least $1 billion in annual sales and is present in all but three countries (Cuba, North Korea and Russia). This gives Coca-Cola stable, predictable cash flow in developed countries and tremendous organic growth potential in emerging markets.
Coca-Cola is also known for its leading capital return program. In February, the company increased its quarterly dividend by 5.4%, which marked the 62nd consecutive year it increased its dividend. Berkshire Hathaway generates an annual return of about 60% over its cost basis for Coca-Cola stock.
Finally – and to stay on topic – the valuation is logical. Coca-Cola’s forward price-to-earnings ratio of 21 is about 10% lower than its average annual earnings multiple over the past five years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions at Amazon. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway, and Chevron. The Motley Fool has a disclosure policy.
3 Warren Buffett Stocks Worth Buying for the Second Half of 2024 (And Beyond) was originally published by The Motley Fool
