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Berkshire Hathaway (BRK.B) chairman Warren Buffett is among the most famous investors and has a massive fan following. While Berkshire Hathaway has underperformed the markets over the last decade and the stock is trailing the S&P 500 (SPY) in 2023 as well, since inception it has beaten the index by almost 10%.
Buffett is among the best value investors of all time and looks at a “margin of safety” when buying companies. While Berkshire holds over 50 marketable securities in its portfolio, I believe Citigroup (C) and Amazon (AMZN) are two Buffett stocks that look relatively undervalued in July 2023.
Berkshire Hathaway bought a stake in Citigroup in 2022
Buffett’s love affair with financials hasn’t ever been undercover and the “Oracle of Omaha” always had a flair for bank stocks. At one point in time, Berkshire was the biggest stockholder in American Express (AXP), Bank of America (BAC), Bank of New York Mellon (BK), U.S. Bancorp (USB), and Wells Fargo (WFC), and also held significant stakes in JPMorgan Chase (JPM) and Goldman Sachs (GS).
Buffett has since exited Bank of New York Mellon, U.S. Bancorp, Wells Fargo, JPMorgan Chase, and Goldman Sachs. The conglomerate continues to hold on to the long-held stake in American Express and has added more shares of Bank of America. In 2022, Buffett took a new stake in Citigroup and it became the only new bank that he added in many years. The conglomerate bought the stake at a time when the bank is undergoing a transformation.
Bank stocks bore the brunt of the regional bank crisis
The banking sector underperformed the markets in the first half of 2023 and was in the red even as the S&P 500 soared over 15%. Regional banks particularly fared poorly and the iShares Regional Bank ETF (IAT) is still down over 25% for the year. The entire banking space got hammered amid the regional banking crisis in Q1 2023 but the larger banks largely came out unscathed from the turmoil as the fallout from the crisis was quickly controlled.
However, the US banking sector is now looking healthy and despite the macroeconomic slowdown, the delinquencies are under check. The sector might see buying support in the coming months as the beaten-down sectors play catchup with tech stocks.
Citigroup stock is up just under 5% for the year and trades 13.2% below its 52-week highs.
Why Citigroup looks like an undervalued Buffett stock to buy in July 2023
Citigroup is transforming its business and has exited several international markets. The bank has decent operating ratios and in the first quarter of 2023, it had an ROE of 9.5% and a Common Equity Tier 1 (CET) ratio of 13.4%.
It had a tangible book value of $84.21 at the end of Q1 2023 while the current stock price is around $47.4 – which means a price-to-tangible book value of 0.56x. As a general rule of thumb, a bank is seen as undervalued when the ratio falls below 1x – and in Citigroup’s case, it is well below that level.
While Citigroup’s price-to-tangible book value multiple has been below 1x for quite some time now, it is currently even below the five-year average of 0.81x. The forward PE multiple of 7.7x also looks on the lower side and I believe the stock looks a good candidate for rerating – especially as the business turnaround efforts start reflecting in its earnings.
Amazon looks like a good stock to buy
Berkshire bought a stake in Amazon in 2019 but it wasn’t the Oracle of Omaha who bought the stake. On his part, Buffett has admitted to missing out on tech names like Alphabet (GOOG) and Amazon.
Meanwhile, while Citigroup looks undervalued based on PE and price-to-book value multiple, Amazon's forward PE multiple of 83x would not appear cheap – at least at first sight.
Amazon’s current multiples appear elevated as its earnings have been subdued due to multiple reasons including high inflation and excess capacity. However, analysts predict a steep rise in the company’s earnings and forecast a rise of 119% and 52% respectively in 2023 and 2024. Also, I believe Amazon’s cash flows would improve significantly in the next couple of years as it currently has excess capacity and its capex would be lower in the coming years.
Earlier this week, Wells Fargo listed Amazon stock as a top pick with favorable risk-reward. The firm is not alone in enlisting AMZN as a top pick, and Citi, JPMorgan, and Bank of America also listed it as a top 2023 idea.
Wall Street is overwhelmingly bullish on the stock and analysts rate Amazon’s stock a Strong Buy:
Of the 37 analysts that cover AMZN, 31 rate it a Strong Buy, 5 a Moderate Buy, and 1 a Hold. None of the analysts has a Sell rating on Amazon which signals how bullish they are on the stock. Also, it has the highest recommendation among FAANG peers.
Amazon continues to deliver in 2023
The company’s revenue growth slumped to an all-time low of around 9% in 2022 as many shoppers went back to brick-and-mortar shopping. However, the pivot towards e-commerce is a secular theme along with cloud - and Amazon has a strong lead in both businesses.
For example, this morning, Amazon said that its first day of its Prime Day event, on July 11th, was the biggest sales day in its history, with shoppers buying 375 million items.
It also has a sprawling advertisement business and I believe the company’s AI foray would also add value in the coming years. Amazon has an enviable logistics network and has built an ecosystem that competitors would find hard to imitate anytime soon.
While AMZN stock has gained 55% in 2023 and is outperforming the Nasdaq (QQQ), it is still 43% below its all-time highs and I believe the stock has room to run further from these levels.
On the date of publication, Mohit Oberoi had a position in: AMZN , C , SPY , QQQ , BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
