August hasn’t been a good month for markets, as investors have been rattled by a hawkish Fed, soaring valuations, and the deepening slowdown in China. The rally in artificial intelligence (AI) stocks has also lost steam, and Nvidia (NVDA) barely managed to close in the green despite a stellar fiscal Q2 earnings report last week.
While U.S. stocks have rebounded from their August lows, benchmark equity indices look to set to close the month in the red. As markets turn volatile after a strong first-half performance, I believe Berkshire Hathaway (BRK.B) and PayPal (PYPL) are two value stocks worth buying at these price levels.
Berkshire Hathaway Stock Is Underperforming in 2023
Berkshire Hathaway is led by the legendary investor Warren Buffett, with Charlie Munger as his deputy. The “Oracle of Omaha” is known for his value investing credentials, which are reflected in the conglomerate’s investing philosophy.
Just as Nvidia can be a part of almost every growth portfolio, I believe Berkshire Hathaway can be a core part of any value investor’s portfolio - and over the long term, it can beat the S&P 500 Index ($SPX). To be sure, in recent years, Berkshire Hathaway shares have routinely lagged the SPX (accounting for dividends), including a 20% underperformance in 2019 – which was Buffett’s sixth-worse performance gap since 1965, when he took control of the company.
The stock did outperform in 2022, and finished in the green even as broader U.S. markets sold off, but BRK.B is underperforming the SPX in 2023.
However, I believe that Berkshire is among the least understood and sparsely followed companies, with only a handful of analysts covering the shares – despite it being among the top 10 companies by market cap. Berkshire has a Strong Buy rating from the few analysts that do cover it, and the stock's mean target price of $414 represents expected upside potential of nearly 15% from current levels.
Why Berkshire Hathaway is a Good Value Stock to Buy
Berkshire is a diverse conglomerate, and apart from a portfolio of publicly traded companies – where Apple (AAPL) is the top holding – it holds several businesses ranging from industrials, energy, railroads, and insurance.
These businesses generate a lot of cash, which - coupled with the float from the insurance business - provides Buffett the firepower to invest in either publicly traded companies or acquire them altogether. Buffett was a net seller of stocks in the first half of 2023, though, and as a result, Berkshire Hathaway’s cash pile rose to $147.2 billion at the end of June - the second-highest on record.
In terms of valuation, the stock trades at a next-12-month enterprise value-to-earnings before interest tax, depreciation, and amortization multiple of 13.94x, which looks reasonable. For context, I am not looking at the traditional price-to-earnings (PE) multiple, as it can provide a distorted picture due to unrealized profits and losses on equity investments, which can lead to massive volatility in the company's earnings.
While Buffett might have slowed down his repurchases of Berkshire shares, the fact remains that the company is still repurchasing stock while cutting its holdings in publicly traded companies. At these prices, I believe BRK.B looks like a reasonably good buy.
PayPal Stock Crashed in 2022
PayPal stock lost almost two-thirds of its market cap in 2022, and was among the worst-performing S&P 500 stocks of the year. PYPL continues to underwhelm in 2023; not only did the stock sit out the tech rally, it is down nearly 12% for the year.
The share price underperformance coincides with some fundamental challenges for PayPal. The company faces rising competition from rivals like ApplePay, margin compression has been a pain point, and its earnings plunged in 2022.
Plus, while the company posted better-than-expected earnings in Q2, a falling user count spooked investors.
Why PYPL Looks Like a Good Value Stock to Buy
Earlier this month, PayPal announced that it has appointed Alex Chriss as its new CEO effective Sep. 27. The new leadership might help the company regain some of its lost mojo - and from a valuation perspective, PYPL stock looks attractive, with an NTM PE multiple of 11.8x resting near all-time lows.
Also, while Berkshire might have slowed down the pace of buybacks, PayPal expects to repurchase around $5 billion worth of its shares in 2023. For context, that's about 7.3% of its market cap. The repurchases make perfect sense for the company, given its low valuations, and should help in lifting per-share earnings.
To be sure, the company still faces several challenges, including rising competition and contracting margins. Analysts expect the company’s revenues to rise 7.8% in 2023 and 9.2% in 2024 – while projecting the fintech company’s earnings to rise 22.1% and 17% in these years.
Overall, Wall Street analysts rate PYPL stock as a Moderate Buy. Of the 30 analysts covering the stock, 18 have a Strong Buy rating, while one analyst has a Moderate Buy rating. The remaining 11 have a Hold rating on the shares.
Meanwhile, it's notable that PayPal stock even trades below the Street-low target price of $65. Its mean target price of $89.61 is a premium of about 43% to current levels, while the Street-high target price of $126 implies expectations for the stock to more than double.
Overall, I believe that while PayPal is currently out of favor with markets, the stock’s risk-reward looks favorable, and it should be a good value stock to buy at these levels.
On the date of publication, Mohit Oberoi had a position in: PYPL , AAPL , BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
