Last week closed with a sudden market rally after better than expected October inflation data, but this week’s trading has been unpredictable. There is a degree of uncertainty here; investors want to buy – but inflation is still high, and interest rates are still rising, making for a tough economic environment.
But it was tough all year, and that didn’t stop the legendary billionaire investor Warren Buffett from building his firm Berkshire Hathaway on a stock shopping spree for a month. Buffett is buying stocks despite inflation, and it’s worth taking a moment to look at what he looks for when he picks a stock.
His main point, in almost every purchase, is to buy into a company that makes things. This is an established policy of his, but it is more important than ever during a period of inflation. Buffett believes that investors should buy into companies that make products that customers will want or need to buy, regardless of price. These are the companies that will succeed even in an inflationary regime. As he says, if customers like or want the products, “It makes no difference what happened to the price level.”
So let’s check in with Berkshire Hathaway. According to the firm’s latest regulatory filings, Buffett bought heavily in two stocks that are feeling the pressure at first glance. We ran them through the TipRanks database to see if a cadre of Wall Street experts agreed with their picks. Let’s take a look at the results.
Taiwan Semiconductor Manufacturing (TSM)
Let’s start with Taiwan Semiconductor, a large firm in one of Taiwan’s major industries. The island country is one of the world’s largest producers of semiconductor chips, and TSM is the largest of its chip companies – and one of the world’s largest chipmakers. TSM not only makes chips an in-house designed product; it is also the world leader in contract chip production, acting as a foundry for other firms. The company has a market cap of more than $400 billion, even after its share price has fallen 33% this year.
Semiconductor chips are big business, and TSM saw $56.8 billion in total revenue last year. So far this year, the company has seen year-over-year revenue growth in every quarter; the latest report, for 3Q22, showed a $20.2 billion top line, up 36% y/y. On earnings, the company reported $1.79 per ADR unit, up from $1.08 billion in 3Q21, a 66% increase. Additionally, the company is guiding for a 4Q22 top line of between $19.9 billion and $20.7 billion. Looking beyond Q4, however, TSMC expects customer inventory drawdowns to weigh on 1H23 results.
TSM is committed to a strong cash return program for investors, and pays a regular quarterly dividend. The company has not missed a payment since 2004, and boasts that it has never reduced its quarterly payment. Taking into account currency exchange rates between Taiwan and the US dollar, the US dividend per share varies from time to time. The final payment was declared at 44 cents per share (US currency); at this rate, it makes annual to 2.2%.
This company combines two qualities that Warren Buffett has always sought – an essential product and a reliable dividend. In his Q3 filings, Buffett disclosed a massive buy-in for TSM, of more than 60 million shares. This holding is now worth $4.77 billion at the current share price.
Needham analyst Charles Shi agrees that TSM is a stock to buy, as it offers “positive risk/reward.”
Although a deep recession is expected in early 2023, Shi believes the company will find support in the form of better pricing. He writes: “We estimate TSMC’s average wafer price to grow 23% in 2023, including widely executed 6% pricing increases, with the rest of the growth coming from the mix shift to high-end nodes, driven by the 5nm Ramp of all non-Apple Tier-1 customers and Apple’s 3nm ramp. The pricing growth will offset unit reductions and set the stage for a ~10% growth year for TSMC.”
To that end, Shi rates TSM shares a Buy along with a $110 price target, indicating a potential 38% upside in the coming year. (To view Shi’s track record, Click here)
In total, TSM has 4 recent analyst reviews on record, all of which agree: this is a Buy stock, giving it a unanimous Strong Buy consensus rating. Shares are priced at $79.45 and their average target of $99.50 suggests a one-year upside potential of 25%. (See TSM stock forecast on TipRanks)
Louisiana-Pacific Corporation (LPX)
The second ‘Buffett’ option we’ll look at is Louisiana-Pacific, a building materials firm based in Tennessee. This company is at the forefront of the global market for oriented strand boards and other engineered wood construction products. LP markets its product line to builders, contractors and homeowners, and the current line includes wood products for siding, framing and paneling. LP offers a variety of options and upgrades, including fireproofing, weatherproofing, and insulation, that are required in home construction.
LP business can vary from quarter to quarter, due to fluctuations in the home building industry due to weather, mortgage rates, and average home prices. That said, the company brought in $852 million in net sales for 3Q22, down 36% from the year-ago period. Adjusted EPS, at $1.72 per share, was down significantly from the $3.87 reported in 3Q21, although it beat the $1.50 forecast on hand. The company has $482 million in cash at the end of the quarter.
Looking at the dividend, this firm has been paying out consistently since 1974. The current payout, announced in October for a December 1 payout, is set at 22 cents per common share. The annual rate of 88 cents per share gives a modest yield of 1.4%. Reliability is the key to it.
Even though the US home building sector is facing pressure from rising mortgage rates, homes are still being built – and that means LP’s unique products are still essential. Buffett gave a nod to that in Q3, with the purchase of 5,795,906 shares, a new position now valued at over $360 million.
Is it a good buy? Harbor analyst Mark Weintraub believes so, laying out an argument that this stock can reward a patient investor. He writes, “For those willing to look through we would like to reiterate the following: (1) we think LPX has a product-driven competitive advantage in Siding with more market share gains, that especially in repair/remodeling, as well as product mix. improvement ahead; (2) its balance sheet remains strong, and (3) an unclaimed valuation relative to our work is the sum of the parts. Additionally, if LPX’s assessment of potential returns from the newly announced Houlton expansion is on the mark, then the company is still in fast rate value creation mode.”
Based on all of the factors above, Weintraub places a Buy rating on shares of LPX, and his $72 price target implies a one-year upside potential of ~16% for the stock. (To view Weintraub’s track record, Click here)
Overall, LPX currently has a Moderate Buy consensus based on 3 Buys and 1 Hold and a Sell, each. The average price target stands at $69.80 and suggests an upside potential of ~13% in the coming year. (See LPX stock forecast on TipRanks)
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Denial: The views expressed in this article are solely those of the analysts in question. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.