Berkshire and Applied Materials Combine Growth and Value
Posted: July 26, 2022
July 25, 2022 (Maple Hill Syndicate) – In my experience, stocks that display both growth and value characteristics are often promising stocks to hold.
Right now, I believe that Berkshire Hathaway Inc. (BRK.B), Applied Materials Inc. (AMAT), Regeneron Pharmaceuticals Inc. (REGN) and Laboratory Corp. of America Holdings (LH) fit the bill.
Should you buy these stocks now, when a bear market has been raging? In my opinion, yes. We may not have hit bottom, but I feel that these securities are attractively priced.
To qualify as a value stock in my analysis, a stock must sell for 15 times per-share earnings or less. As for growth, it must have increased per-share earnings by an average of 12% or better in the past five years.
Among the few dozen companies that can meet these criteria, here are four I recommend.
Even at age 91, Warren Buffett, the chairman of Berkshire Hathaway, continues to impress me with his wisdom, decisiveness and grasp of nuance.
Berkshire is a sprawling conglomerate. It owns some 70 companies outright, including Burlington Northern Santa Fe Railway, Clayton Homes, Duracell, Fruit of the Loom, GEICO, PacifiCorp and Precision Castparts.
It also owns meaningful stakes in dozens of others, notably American Express Co. (AXP), Apple Inc. (AAPL), Bank of America Corp. (BAC), Coca-Cola Co. (KO) and Kraft Heinz Co. (KHC).
Berkshire qualified easily for today’s list. Its five-year earnings growth rate was about 33%. The stock sells for only about eight times earnings.
I think the low multiple reflects investors’ fear that Buffett is only mortal; he must die or retire someday. But I believe that he has able lieutenants (notably Greg Abel, Ajit Jain, Todd Combs and Ted Weschler) to succeed him when he dies or retires.
A major supplier of equipment to the semiconductor industry, Applied Materials is based in Santa Clara, California. Its five-year earnings growth rate is above 17%, and the stock sells for under 14 times earnings.
Like almost every technology stock, Applied Materials have been smacked down in the great tech-stock correction of 2022. It’s down 36%, and now sells for about $102 a share.
I don’t know if the tech-stock debacle is over, but I know that Applied Materials has shown a profit in 14 of the past 15 years. Its return on invested capital will be above 20% this year for the ninth year in a row.
Regeneron Pharmaceuticals had been seen by some investors as a one-trick pony, dependent upon its eye medication Eylea. In my opinion, that criticism is no longer true.
Eylea remained the company’s biggest revenue producer in 2021, to the tune of $9.4 billion in sales. And one of that drug’s key patents will expire in 2023.
Regeneron has two other drugs with big sales, Regen-Cov (for Covid-19) with $7.6 billion in sales, and Dupixent (which treats several conditions, including eczema and esophagitis) with $6.2 billion. Dupixent is a joint venture with Sanofi.
Regeneron also has several approved drugs, each with sales of less than $1 billion.
I think Regeneron is on the bargain counter, having descended from more than $700 a share in April to about $586 now. Its five-year earnings growth rate is 24%, and the stock sells for a little over eight times earnings.
Covid testing has kept medical-testing companies busy lately. That contributed to Laboratory Corp. of America Holdings posting a five-year earnings growth rate of nearly 23%. But even if this pandemic abates, I think we have entered a world in which more people will have more medical tests more of the time.
Priced at a little over 11 times earnings, I think Laboratory Corp. is appealing now. It also might lend a bit of stability to your portfolio if the pandemic continues and new variants of Covid-19 continue to plague the world.
Beginning in 2001, I’ve written 16 columns on stocks that possess both growth and value characteristics. (This is the 17th.) The average 12-month return on my recommendations has been 18.6%.
By comparison, the Standard & Poor’s 500 Total Return Index over the same periods has averaged 11.2%.
Of the 16 sets of recommendations, 12 have been profitable, while 11 have beaten the index.
Caution: My column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
My picks from a year ago declined 0.7%, while the index lost 8.4%. Homebuilder Pulte Group Inc. (PHM) was the biggest loser, down 15.4%. Supernus Pharmaceuticals Inc. (SUPN) was the best gainer, up 13.9%.
In between were Allstate Corp. (ALL), down 8.1% and American Business Bank (AMBX), up 6.7%.
Disclosure: I own Berkshire Hathaway personally and for almost all of my clients. Some of my clients own Allstate.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.