Warren Buffett has been widely criticized for sitting out much of the stock market rally. Now it seems the Oracle of Omaha is heading back into the stock market in a big way, sending a powerful message to traders.
As Buffett was ultra-conservative when the stock market began to decline, his willingness to buy could be a strong sign that the market is on stable footing despite worries about inflated valuations.
This week, Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) added 33.9 million shares to its position in Bank of America (NYSE:BAC). Buffett declined to comment on the purchase, but his move sparked a wave of curiosity among investors. Is the stock market’s volatility coming to an end?
There’s no way to know what Buffett is thinking without his input, but his BAC stock purchase does offer a few key clues about his investment strategy moving forward.
Buffett’s brand of investing encourages investors to put long-term value over short-term gains.
Over the past five months, the stock market has been volatile. Valuations have gone wild as investors try to scoop up quality stocks at a discount. Cautious investors who didn’t get caught up in the ‘buy everything with letters’ rally can still find pockets of long-term value in today’s bloated market.
Bank of America is one of them. Unlike the broader stock market, BAC stock never really recovered from the March nosedive. The bank is still trading 30% lower than its pre-pandemic levels. Buffett has long lauded the benefits of BAC stock, making now a good time for him to buy.
In addition to BAC, there are a few other value stocks out there that have missed the rally.
Energy infrastructure firm Kinder Morgan (NYSE:KMI) is one of them. The energy sector has been beaten due to uncertainty. KMI stock is no exception—the firm is trading 36% lower than its pre-pandemic price.
Kinder Morgan’s second-quarter results were predictably gloomy, and investors responded by fleeing the stock. As Roger Conrad of Conrads Utility Investor noted, although KMI has been hit hard by the pandemic, the company has been successful in navigating through the ordeal without putting its dividend at risk.
Despite the outward appearance of weakness, Kinder’s numbers and guidance strongly confirm it’s still successfully navigating what’s easily the most challenging environment for North American midstream in decades.
KMI stock offers a juicy 7.37% dividend yield that appears relatively safe. While it’s true that the energy sector is in for a wild ride in the year ahead, Kinder Morgan looks like a solid bet on an eventual recovery. Its dividend payments should make the bumps easier to stomach as well.
Tech stocks have been drivers of the stock market’s rally, but some quality names have been left out.
HP Inc (NYSE: HPQ) is one such tech name that hasn’t gotten much love throughout the stock market’s meteoric rise. HPQ stock is trading 25% below its February highs, suggesting the firm still has a great deal of pandemic-related losses to recover.
Like in the case of KMI, there’s a reason investors haven’t flooded HPQ stock. Demand for printing supplies has declined substantially amid office closures, and the fact that Xerox’s takeover attempt crumbled hasn’t helped HP’s valuation.
As Evercore ISI analyst Amit Daryanani pointed out this week, the market has become overly bearish on the firm.
First of all, he pointed out that HPQ’s current valuation suggests the demand for enterprise printing supplies will decline between 20% and 30% over the next four years. Of course, that’s possible but unlikely if you believe the world will eventually return to normal post-pandemic.
We think this is too pessimistic and as things stabilize though at a lower base, there is upside
What’s more, Daryanani pointed out that HP may be worth $27 per share on a sum-of-parts-basis. That’s nearly 40% higher than where the stock is trading now.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: July 25, 2020 2:11 PM UTC