The tumultuous developments in August have left investors uneasy, with concerns ranging from a hawkish stance by the Federal Reserve to surging valuations and the escalating economic slowdown in China. The once-booming artificial intelligence (AI) sector has also lost its vigor, exemplified by Nvidia (NASDAQ:NVDA) barely eking out gains despite a remarkable fiscal Q2 earnings report last week.
Even as U.S. equities rebound from their August nadir, key benchmark indices appear poised to conclude the month in negative territory. With market volatility emerging following a robust first-half performance, my attention turns to two value stocks that appear compelling at current price levels: Berkshire Hathaway (BRK.B) and PayPal (PYPL).
Berkshire Hathaway’s Performance Dynamics in 2023
Under the leadership of investing luminary Warren Buffett, with Charlie Munger as his deputy, Berkshire Hathaway (NYSE:BRK.B) has a storied history. The “Oracle of Omaha” is renowned for its value-driven investment philosophy, a cornerstone of the conglomerate’s approach.
Just as Nvidia finds a place in nearly every growth-oriented portfolio, I hold the belief that Berkshire Hathaway should serve as a cornerstone of value-focused investors’ portfolios. Over the long term, its potential to surpass the S&P 500 Index ($SPX) appears promising. However, it’s worth noting that recent years have witnessed Berkshire Hathaway shares consistently trailing the SPX when accounting for dividends. This includes a notable 20% underperformance in 2019, marking Buffett’s sixth-largest performance gap since taking the reins in 1965.
While 2022 saw the stock outperform, weathering broader U.S. market declines, 2023 has seen BRK.B lag behind the SPX. Despite being among the top 10 companies by market capitalization, Berkshire remains somewhat enigmatic and lightly covered by analysts. Nevertheless, the few analysts who do cover it maintain a “Strong Buy” rating, with a mean target price of $414, suggesting a potential upside of nearly 15% from current levels.
Why Berkshire Hathaway Presents a Compelling Value Proposition
Berkshire’s expansive conglomerate structure encompasses a diverse array of businesses. Beyond its portfolio of publicly traded companies, where Apple (NASDAQ:AAPL) holds the premier position, Berkshire boasts ventures across industries such as industrials, energy, railroads, and insurance.
The considerable cash flow generated by these ventures, in conjunction with the insurance business’s float, empowers Buffett to engage in both acquisitions and investments in publicly traded firms. While Buffett reduced his stock holdings in the first half of 2023, this strategic move resulted in Berkshire Hathaway amassing a cash reserve of $147.2 billion as of June’s close, marking the second-highest total on record.
Regarding valuation, the stock is trading at an enterprise value-to-earnings before interest tax, depreciation, and amortization multiple of 13.94x for the next 12 months, a level that appears reasonable. It’s important to consider this metric instead of the traditional price-to-earnings (PE) ratio, as the latter can present a distorted view due to unrealized equity investment gains and losses, leading to substantial earnings volatility.
While Buffett may have slowed his pace of Berkshire share repurchases, the company remains committed to buybacks while trimming positions in publicly traded entities. Given the current prices, BRK.B stands as a prudent investment choice.
PayPal’s Stock Trajectory: Reevaluation After 2022
The year 2022 saw PayPal‘s (NASDAQ:PYPL) market capitalization plummet by nearly two-thirds, marking it among the S&P 500’s poorest performers. Regrettably, 2023 has continued to be a lackluster year for PYPL, with the stock not only abstaining from the tech rally but also recording a nearly 12% decline.
This share price decline aligns with fundamental challenges that PayPal grapples with. Fierce competition from rivals like ApplePay, margin compression, and a sharp decline in earnings during 2022 have posed significant obstacles. Furthermore, despite exceeding expectations in Q2 earnings, investor concerns were ignited by a decrease in user count.
Why PayPal’s Current Standing Offers Value
Announcing the appointment of Alex Chriss as the incoming CEO effective September 27, PayPal seeks to rejuvenate its momentum. From a valuation perspective, PYPL stock stands appealing, trading at a near-all-time-low NTM PE multiple of 11.8x.
While Berkshire’s buyback pace may have eased, PayPal anticipates repurchasing approximately $5 billion worth of its shares in 2023. For context, this accounts for roughly 7.3% of its market capitalization. These buybacks align well with the company’s undervalued status and are anticipated to enhance per-share earnings.
Undoubtedly, several challenges persist, including heightened competition and shrinking margins. Analysts foresee a 7.8% increase in the company’s revenues for 2023, followed by a 9.2% rise in 2024. Earnings projections for the fintech firm point toward a 22.1% increase in 2023 and a 17% increase in 2024.
Wall Street analysts collectively designate PYPL stock as a “Moderate Buy.” Of the 30 analysts scrutinizing the stock, 18 assign it a “Strong Buy” rating, while one analyst leans toward a “Moderate Buy.” The remaining 11 analysts maintain a “Hold” rating.
Remarkably, PayPal’s stock trades below the lowest target price of $65, and its average target price of $89.61 represents a substantial 43% premium over current levels. The highest target price of $126 suggests an expectation of the stock more than doubling.
In summary, while PayPal’s current favor with the market might be diminished, the stock’s risk-reward balance appears favorable. Consequently, it presents itself as an enticing value stock to consider purchasing at present levels.
Featured Image: Freepik @ prostooleh
