When Berkshire Hathaway (NYSE:BRK-B) posted operating earnings growth of 20%, this reaffirmed how well Warren Buffett and its team manage the conglomerate. The company benefited from impressive net income from its insurance investment, as sell as surging profits from its utility and energy holdings. With these strong operating earnings, Berkshire has been able to improve shareholder returns by buying back over $1 billion of its common stock. For investors looking to create a wealth-creation machine, it’s important to assess the Warren Buffett stocks that have driven such impressive performance over the long-term.
Berkshire continues to amass a large cash balance. Currently, the company holds around $109 billion in cash and short-term securities. This provides the potential for more Warren Buffett stocks to be added to the mix in upcoming quarters.
Indeed, there may be some rotation yet to come. The conglomerate’s earnings from its railroad sector weakened in the quarter. Lower freight volumes and higher fuel and other operating costs weighed on results.
Thus, investors might want to pick a subset of this long list of Warren Buffett stocks. With this strategy, investors may avoid exposure to areas one is uncomfortable with (such as railroads or insurance), and gain more exposure to other areas of the portfolio. It’s really personal preference.
With that said, these seven Warren Buffett stocks I think are worth buying as we head into 2023.
Buffet’s holdings have strong growth and quality scores
The companies listed above have strong brand names and are especially compelling. Inflation will increase their input costs. However, these Warren Buffett stocks have the ability to pass on higher costs to their customers, sustaining profit margins.
Source: Hadrian / Shutterstock.com
Recently, Apple (NASDAQ:AAPL) launched a new generation of iPhone 14 devices. This is one segment Mose investors in AAPL stock are watching closely. That’s because iPhone sales tend to be the revenue and profit growth driver for the company, as customer demand increases. Accordingly, this company’s results provided enthusiasm among investors. In the fourth quarter, iPhone sales grew by 10% to $42.6 billion, despite tougher year-on-year comparisons.
Warren Buffett has been clear that his investment in Apple is for the long term. Thus, as we head into 2023, I think Buffett will be keeping an eye on how growth strengthens as a result of strong customer demand for the more expensive 14 Pro and Pro Max. Indeed, had the company not faced supply constraints for those models, Apple would have posted better results.
Additionally, Apple’s services have high margins, which is a key selling point for investors. In the last few years, the company grew its Music, TV+ , and News+ businesses. Furthermore, Apple added Apple Arcade and Apple Fitness+ to its portfolio of services. Now, the company is offering the One bundle. By offering various price tiers, customers will be able to sign up for the service that suits their needs best.
The company is in the early phases of expanding Apple TV+, introducing original content first and adding only four to five shows per title. Now that it has more viewers, Apple will increase the content and increase prices. Accordingly, I expect this move to lift revenue for Apple heading into the New Year.
Ally Financial (ALLY)
Berkshire recently boosted its position in Ally Financial (NYSE:ALLY). Accordingly, readers may be speculating that Buffett is betting that charge-offs will start leveling off after the third quarter.
In Q3, Ally’s Chief Executive Officer, Jeff Brown, thinks its charge-off levels will stabilize by mid-2023. This depends on how far the Federal Reserve raises interest rates. Those levels depend on where inflation comes in at next year.
Ally Financial services the automotive loan market. Accordingly, higher interest rates add lifetime losses to its books. Investors might assume that funding costs will not exceed 4%. However, if these costs do rise to this level, Ally will still get a return on equity of nearly 21%, with a return on assets of 2%.
Ally is growing its loan book, deploying $12 billion worth of capital for new loans. For next year, the company is targeting annual loan volumes of $48 billion. Should risk levels rise, these loan numbers may get trimmed. That said, I still think this is a stock Buffett is in for a reason, and I like the valuation.
Activision Blizzard (ATVI)
Source: Lauren Elisabeth / Shutterstock.com
Activision Blizzard (NASDAQ:ATVI) is a video game developer that Microsoft (NASDAQ:MSFT) plans to buy for $95 a share. The stock is currently trading at a discounted price relative to its buyout offer because markets are skeptical that the deal will go through.
The European Union is opening an in-depth investigation into Microsoft’s $69 billion bid for Activision. In a statement, the EU said that as a result of the deal, competition would worsen in several markets. It is concerned that the console and PC gaming market will have less competition. Furthermore, Activision would have less competitive pressure in the subscription and cloud game streaming services segments.
Microsoft could offer concessions to the EU, and is actively engaging with regulators. It appears Warren Buffett likely believes the deal will close in 2023. He need only hold ATVI stock and wait for the buyout to close.
If regulators reject the buyout, Activision gets a breakup fee worth $2 billion. The fund infusion would greatly benefit Activision’s balance sheet, allowing for a payout of a special dividend to shareholders. Alternatively, the company could buy back stock. Either way, Activision shareholders will benefit.
Source: tishomir / Shutterstock.com
Chevron (NYSE:CVX) is among the energy companies Berkshire holds to hedge against oil and gas inflation. Chevron is a company with ambitious plans to deploy its capital, something Warren Buffett likes. As the pandemic is in the rear-view mirror, Chevron hinted at providing an update to investors with its updated business plan and capital budget in December.
Markets are not worried that cost inflation might erode the company’s profitability. CFO Pierre Breber expects costs to rise by 20% next year compared to this year. Fortunately, the company is operating well below its capital budget. That gives Chevron the flexibility to increase its investments over time, with growth in production likely.
Refining activity is in severely short supply. Accordingly, Buffett probably expects refining margins to remain high, given the fact that many companies in this space shut down refineries and are unlikely to bring them back online. As one of the key players in planning new refinery developments, Chevron appears to be a politically-savvy way to play this space. Additionally, by easing global energy constraints, the company could increase its revenue potential thanks to strong energy demand.
HP Inc. (HPQ)
HP Inc. (NYSE:HPQ) is a personal computer supplier. Despite headwinds from low demand, HP’s computer and printer sales could eventually recover.
Commercial sales of HP products are still strong. However, commercial customers may slow their orders as their concerns about a slowdown increase. As budgets are adjusted, HP will have a better idea of the market conditions for 2023 soon. That said, even if demand stalls, I think this will only push forward demand for HP’s products. That’s because customers still need to upgrade hardware every few years.
Next year, the addressable market for PCs is expected to be around $300 million. It will grow, due primarily to the effects of the pandemic. After lockdowns ended, corporations faced calls to support a hybrid work environment. I think this secular trend will continue, meaning increased unit demand for PCs at home and work. For example, remote schooling and telemedicine are segments of the economy which will have a higher demand for personal computers.
Corporations will seek higher productivity to offset inflationary pressures and the economic slowdown. This could push average selling prices higher as customers buy more powerful systems to achieve greater staff productivity.
Source: Fotazdymak / Shutterstock.com
Coca-Cola (NYSE:KO) is a company that’s always found a way to navigate global challenges. Despite the conflict in Ukraine, pandemic lockdowns in China, and inflation everywhere, this company still posted strong revenue growth.
Coca-Cola posted impressive revenue growth of 11.0% year-over-year. It expects organic revenue growth of 14% to 15% in 2023. Thus, its expected earnings per share growth of 15% to 16% will follow. For 2023, the company has forecasted top-line growth that also justifies owning this stock.
Consumers are changing their behavior. Although many are loyal to buying Coca-Cola products, they may still spend less. Fortunately, the company has a dynamic basket of products which could see its overall demand for beverages, including water and juices, rise. That would offset a decline in sales of private label products.
Additionally, Coca-Cola may offer price pack promotions that increase product affordability. Demand could rise without hurting the company’s profit margins. Thus, I think investors should expect strong business momentum this year to stretch into 2023.
Occidental Petroleum (OXY)
Source: Pavel Kapysh / Shutterstock.com
Occidental Petroleum (NYSE:OXY) has been one of the best-performing Warren Buffett stocks this year. That’s a key reason why Berkshire accumulated a bigger position in OXY stock over the year. Aside from being a major energy producer, Occidental also has been investing heavily in carbon capture technology among its facilities, including those in the Permian.
In 2023, Occidental is expected to sustain its capital spending levels. When energy prices rise, the company’s EBITDA remains strong. Thus, I think the revenue potential from upcoming projects next year should more than offset inflationary headwinds.
Investors continue to see shareholder value growth thanks to the company’s continued dividend increases. In the near term, I don’t think Occidental’s dividend will increase alongside its cash flow. Instead, the company will use the cash to buy back shares, potentially nibbling at higher dividends over time.
Currently, Occidental trades at steeply undervalued levels. Warren Buffett sees this, and appears keen on buying this company linked to energy prices. Given Occidental’s impressive cash flows, this is a company worth considering as a long-term investment.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.