With the S&P 500 and Nasdaq at record highs, investing possibilities may appear scarce. Long-term investors may find the best possibilities in Warren Buffett's Berkshire Hathaway stock portfolio. With that in mind, here are three of Berkshire's stocks that look appealing currently and have lots of potential to develop and beat the market.
In early 2023, few investors gave homebuilders a chance. They were wrong. With existing home inventories at a generational low and homebuilders offering great financing incentives, new-home sales were strong. Berkshire bought three homebuilders in 2023, but NVR may be the most intriguing. Those unfamiliar with NVR may notice its land-light model.
The corporation doesn't buy lots of land like most builders. Instead, it acquires building lot purchase options until it has a home under contract. This frees up funds for corporate growth. The fourth quarter saw a 25% year-over-year growth in new orders and 12% in backlog. Housing revenue fell somewhat year over year, although not as much as experts predicted at the start of the year.
With this order growth, the future looks good. Even though shares are up 67% year over year, NVR's 16x projected earnings valuation in a robust new-home sales environment is very reasonable. You might not have guessed 20 years ago that General Motors' finance arm would become a leading online bank in the U.S. However, Ally Financial (NYSE: ALLY), spun out from GM after the financial crisis, has done so.
Ally's main business is vehicle loans, given its history. However, this company has much more. A brokerage platform, consumer deposit platform with $155 billion in deposits, and various loan types are among its many strengths.
It's clear why Berkshire owns just under 10% of Ally. This business is lucrative. In 2023, its average vehicle loan yielded 10.7%. Even with a fair number of loan defaults, the bank's average financing cost (mainly deposits) is 4.35%, leaving a good profit. If interest rates decrease this year, as projected, finance costs could drop dramatically.
Ally's 2023 net interest margin was among the finest in banking. Stock trading at 12x anticipated earnings may be a bargain. Capital One (NYSE: COF), one of Berkshire's more recent financial holdings, may be a good long-term investment, especially with its imminent acquisition of Discover.
Two of the largest US credit card companies will merge, creating cost advantages. Capital One estimates $2.7 billion in yearly synergies by 2027, and its banking infrastructure might benefit Discover's online-only banking products.
Capital One having one of the four major payment networks could have the actual possibility. Discover ranks fourth but might grow significantly under Capital One. The bank might eventually migrate most of its debit and credit card products to Discover's network and invest more in network growth than Discover could.
Capital One shares are trading at 10x forward earnings and 8% below book value, despite being near a 52-week high. Capital One is worth investigating now given the Discover acquisition's potential.
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