For all his long-term positions, legendary investor Warren Buffett frequently adds to and subtracts from current positions. Sometimes, he liquidates them and establishes new ones, too.
Buffett’s Berkshire Hathaway (BRK.B) bought six stocks in the second quarter, including two new positions, according to a regulatory filing. And it sold nine stocks, eliminating two positions entirely.
Given Buffett's track record, many of the buys should perform well. Berkshire’s compound annual return has almost doubled that of the S&P 500 (19.8% versus 10.2%) under Buffett’s reign: 1965-2023.
Despite the potential for the six stocks Buffett snagged in the second quarter, investment research stalwart Morningstar says the best three Berkshire stocks to buy now are ones that Buffett didn’t touch in the second quarter.
That’s because Morningstar sees these companies benefiting not only from strong fundamentals but also as undervalued. Morningstar assigns valuation according to its analysts’ fair value estimates for the stocks.
Many of Berkshire’s stocks are fairly valued or overvalued now, according to Morningstar’s metrics. So, companies that may have very strong fundamentals were left off the list. Here’s the terrific trio in alphabetical order.
Morningstar’s three Buffett picks
1. Charter Communications (CHTR) , the big cable TV/telecommunications company.
Morningstar assigns the company a narrow moat, meaning it sees the company with competitive advantages that will last at least 10 years. Morningstar's fair value estimate is $490. Aug. 14 stock quote: $352.
“We generally like Charter’s efforts to drive customer penetration by limiting price increases, improving customer service, and expanding its offerings to appeal to a variety of preferences,” wrote Morningstar analyst Michael Hodel.
“However, we aren’t enamored with the extremely heavy discount on broadband and wireless services it offers.”
Related: Morningstar unveils top-tier value stocks to own
2. Kraft Heinz (KHC) , the giant food company.
Morningstar moat rating: narrow. Fair value estimate: $57. Aug. 14 stock quote: $34.20.
“The weakening consumer narrative percolated throughout Kraft Heinz’s second-quarter results,” wrote Morningstar analyst Erin Lash. Organic sales slipped 2.4% on a more than 3% retraction in volumes.
But management responded astutely with plans to promote its products to tighten price gaps in certain categories, she said. Those categories are estimated at 30% to 40% of its U.S. mix. The idea is to counter the tough consumer spending backdrop.
3. VeriSign (VRSN) is the sole registry for Internet domains, including dot-com and dot-net. Morningstar's moat rating is wide, meaning Morningstar sees it as having at least 20 years of competitive advantages. The fair value estimate is $195. The Aug. 14 stock quote is $178.
Morningstar analyst Emma Williams wrote that the lucrative contracts for the dominant dot-com and dot-net domains run for six years and have a presumptive right of renewal, provided Verisign meets its contractual obligations.
“We expect .. the registry agreements to renew into perpetuity, underpinning our wide-moat rating,” she said.
Berkshire likes Ulta Beauty
One of the more interesting of Buffett’s second-quarter moves was the purchase of 690,000 shares of Ulta Beauty (ULTA) , worth $266 million at the quarter’s end.
Ulta is the country’s largest specialized beauty retailer.
The stock traded at $366 on June 15, up 11% from a day earlier on the Buffett news. It’s still down 25% year to date amid strong competition.
Related: Warren Buffett's Berkshire sheds stock of major bank
TheStreet Pro columnist Paul Price is another Ulta bull.
The veteran investor, who worked at Merrill Lynch and Wells Fargo, recommended the stock in a column the day before news of Berkshire’s purchase.
Ulta’s 234% shareholder return over the past 10 years represents a 57% discount to its cumulative earnings-per-share growth, he said.
So Ulta’s forward price-earnings ratio stands at 12.4 versus a 10-year average of 25.2.
“That means you can now own this top-quality, proven grower at much less than the market multiple of far inferior companies,” Price said.
Two analysts bullish on Ulta Beauty
Oppenheimer analyst Rupesh Parikh also is an Ulta enthusiast. He was impressed with Buffett’s move and the market’s reaction to it.
“The firm views this development as a vote of confidence for the company’s longer-term prospects and a further validation of Ulta’s significantly discounted valuation,” he wrote in a commentary cited by The Fly.
Parikh rates Ulta as outperform, with a price target of $450.
More Warren Buffett:
- What Buffett's huge Apple sale really means
- Warren Buffett's Berkshire sheds stock of major bank
- Analysts revamp Berkshire stock outlook after Warren Buffett meeting
Morningstar analyst David Swartz likes Ulta, too. He assigns it a narrow moat and has a fair value estimate of $405.
“We think Ulta’s brand strength … has allowed the company to thrive despite economic conditions and other external challenges,” he wrote.
“While its high-growth phase is probably over as it has stores in all major US markets, it continues to open stores (about 60 this year), expand its e-commerce (approximately 20% of revenue), and build shops within no-moat Target locations.”
The author owns shares of Berkshire Hathaway and Kraft Heinz.
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