Making money for shareholders has been in Warren Buffett's blood since taking over as CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965. Over that time, he's led Berkshire to an average annual gain of about 20%, which translates into aggregate gains, including the year-to-date performance of the Class A shares (BRK.A), of approximately 3,500,000%. Gains like this are why the investing world pays close attention to what the Oracle of Omaha is buying and selling.
Based on the latest 13F filing with the Securities and Exchange Commission, Berkshire Hathaway has stakes in 45 securities. Among these 45 holdings, five Warren Buffett stocks stand out as screaming buys in December.
While I'm well aware this isn't going to win any points for originality, e-commerce kingpin Amazon (NASDAQ: AMZN) remains a surefire stock to own in Buffett's portfolio.
Most people are familiar with Amazon for its dominant online marketplace. According to an August report from eMarketer, Amazon is expected to handle 41.4% of all U.S. online sales in 2021. That's about 34 percentage points higher than the next-closest competitor. The key, though, is that the company has signed up 200 million people to a Prime membership worldwide. The annual fees collected from these members helps to buoy razor-thin retail margins and allows Amazon to consistently undercut brick-and-mortar retailers on price.
However, the company's future rests with its considerably higher-margin segments, such as cloud infrastructure services. Amazon Web Services (AWS) accounted for only 13.4% of net sales in the third quarter, yet contributed 61.8% of the company's operating income. Even with online sales slowing as coronavirus vaccination rates tick higher and life returns to some semblance of normal, Amazon's critical highest-margin segments (AWS, subscriptions, and advertising) continue to grow rapidly.
If Amazon were to simply hit the median price-to-operating cash flow it's been trading at for the past 11 years, we could be looking at a $10,000 a share company by mid-decade.
Bristol Myers Squibb
Bristol Myers' success is dependent on organically developing and growing its brand-name pharmaceutical portfolio, as well as leaning on acquisitions to push the needle higher.
From an internal development perspective, some of the company's biggest wins include cancer immunotherapy Opdivo and oral anticoagulant Eliquis -- the latter of which was developed with Pfizer. Eliquis should push for $10 billion in sales for Bristol Myers this year, while Opdivo hit $7 billion in revenue last year. Opdivo is particularly intriguing given that it's being examined in dozens of clinical trials and has already received approval for 10 indications in the U.S. Label expansion opportunities, pricing power, and improved cancer screening diagnostics all have the potential to make this a $10 billion a year therapy.
Bristol Myers also made waves with its November 2019 acquisition of cancer and immunology drugmaker Celgene. Buying Celgene added a handful of blockbuster drugs to Bristol's portfolio, including multiple myeloma treatment Revlimid, which will potentially top $13 billion in 2021 sales. Revlimid is protected from an onslaught of generic competition for four more years, which means Bristol Myers will be generating bountiful cash flow in the meantime.
At just 7 times consensus forward-year earnings per share, it's an absolute steal.
Over the past couple of months, Wall Street and investors have raised concerns about payment facilitators like Square or cryptocurrencies eating into Visa's dominance. However, these concerns seem unfounded given Visa's utter dominance of the processing space. As of 2018, it held a 53% share of U.S. credit card network purchase volume, which was more than 30 percentage points higher than the next-closest competitor. I should also mention the U.S. is the leading market for consumption in the world.
Visa's outperformance is also a function of its lending avoidance. By sticking to the processing side of the equation, the company avoids having to set aside capital to cover credit delinquencies during recessions. Not having to cover credit/loan losses is a big reason why Visa rebounds faster than other financial stocks and maintains a profit margin north of 50%.
And have I mentioned that Visa is one of the smartest ways to play rapidly rising inflation? Since the company's fees are tied to the price of goods and services, its revenue and profits will grow as the price for goods and services rises.
Teva Pharmaceutical Industries
The cheapest stock in Warren Buffett's portfolio, brand-name and generic-drug company Teva Pharmaceutical Industries (NYSE: TEVA), is begging to be bought as well. Teva can currently be purchased for a little more than 3 times Wall Street's consensus earnings per share in 2021 and 2022.
Unlike Amazon, Bristol Myers, and Visa, Teva hasn't been firing on all cylinders. Since 2016, the company settled a bribery scandal, buried itself in debt after overpaying for generic-drugmaker Actavis, and has faced a mountain of litigation concerning its role in the opioid epidemic. But while there's reason to not give Teva a valuation premium, an earnings multiple of 3 is overly pessimistic given the steps being taken to right the ship.
In late 2017, Kare Schultz took over as CEO. He's a turnaround specialist who's taken clear steps to improve the business. During his tenure, net debt has been reduced from over $34 billion to around $22 billion, and annual operating expenses have been cut by a double-digit percentage. Teva is leaner than it's been in years and is capable of maintaining annual operating cash flow of $2 billion (or higher).
Furthermore, there's light at the end of the tunnel when it comes to opioid litigation. A trial in California recently went in favor of drugmakers, which could put some bargaining power back in Teva's court. If Schultz can negotiate a national settlement where free or reduced-cost medicine, not cash, is the lure, Teva could probably double very quickly.
Bank of America
The final Warren Buffett stock to buy hand over fist in December is banking juggernaut Bank of America (NYSE: BAC).
Bank stocks like BofA are on the cusp of hitting their growth sweet spot. With inflation picking up, the Federal Reserve will more than likely need to act in 2022 or 2023 to raise interest rates. Boosting the federal funds target rate will lift the net interest income-earning potential of banks with outstanding variable-rate loans.
Among money-center banks, none is more interest-sensitive than Bank of America. The company's third-quarter earnings presentation points out that a 100-basis-point parallel shift in the interest rate yield curve would generate an estimated $7.2 billion in added net interest income over 12 months. Although we're unlikely to see a 100-basis-point shift in 12 months, we are on the verge of seeing higher interest rates significantly bolster BofA's profit potential.
The other impressive aspect of Warren Buffett's second-largest holding is its digitization efforts. Though you probably don't think of Bank of America as a tech-savvy business, the number of digital active users has grown to nearly 41 million, with 43% of all sales in the third quarter coming from online or mobile banking. This push to digitize has allowed the company to consolidate some of its branches in order to reduce costs.
Bank of America should be a no-brainer buy as it enters the sweet spot of its growth cycle.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company.
Sean Williams owns shares of Amazon, Bank of America, Square, and Teva Pharmaceutical Industries. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Bristol Myers Squibb, Square, and Visa. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2022 $1,940 calls on Amazon, short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.