Warren Buffett and his company, Berkshire Hathawayhave made a name for themselves by generating stellar returns for decades. That, combined with the power of time and compounding, has led to Berkshire’s stock outperforming by a wide margin. S&P500which itself has a good history.
Between 1965 and 2023, Berkshire stock has grown 4,384,748%, for a compound annual gain of 19.8%. The S&P 500 has generated a total gain of 31,223%, or a compound annual gain of 10.2% including dividends. This is why so many investors are watching Buffett and Berkshire’s moves so closely, not that you shouldn’t do your own due diligence.
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As we approach the end of the year, here are two Warren Buffett stocks to buy hands down in December.
Berkshire bought Sirius XM Holdings(NASDAQ: SIRI) year-round and is now the company’s largest shareholder. Sirius has undergone many changes this year. The company recently spun off from Liberty Media and conducted a 1-for-10 reverse stock split, an effort to attract more institutional interest through a simplified corporate structure and a higher share price.
The stock is down more than 50% this year and is struggling with high debt and a decline in the number of paying subscribers. Management also lowered the company’s full-year revenue outlook due to lower advertising revenue, so it has work to show investors it’s on track.
However, Sirius remains focused on its long-term strategy to grow its subscription business. The company has paid a lot of money to gain exclusive distribution and advertising rights to podcasts with large audiences, which it hopes will help diversify its subscriber base and attract more advertisers to its platform. In the third quarter, Sirius added approximately 14,000 subscribers for a total of 37.4 million, including both Sirius XM and its sister platform Pandora. It also grew podcast advertising revenue by 6%.
The company’s long-term goal is to grow its subscriber base by 25% from 2023 to reach 50 million, while increasing free cash flow (FCF) by 50% to $1.8 billion. A higher FCF allows the company to do things like pay down debt, buy back stock, and increase the dividend.
While the company still has a lot to prove, the risk-reward outlook is favorable as Sirius appears to be disconnected from market fundamentals. The stock trades below eight times earnings and has not posted gains like the broader market. It also has a dividend yield of almost 4%, so investors are paid to wait.
I also expect the shares to hold up better if a market correction were to occur, as investors have already set low expectations.
Buffett has long been a fan of banking stocks. However, recent years have been tough for the group as several prominent bank failures and an inverted yield curve decimated the sector for two years. The Federal Reserve recently started cutting interest rates, which has helped normalize the yield curve. Banks typically lend short and lend long, meaning the sector performs better when the yield curve steepens.
Berkshire has sold off many of its banking holdings during the pandemic and sold parts of its large stake in the country Bank of America all year round. However, the company has retained its nearly 3% stake Citi Group(NYSE:C)which consumes 1.3% of Berkshire’s more than $300 billion stock portfolio. Citigroup has struggled since the Great Recession and has recently faced a frustrated shareholder base, an overly complex bank and consent orders regarding the company’s internal controls.
CEO Jane Fraser took the helm of the bank in 2021 and has already accomplished a lot, including selling off most of Citigroup’s international consumer franchises, which lacked the scale to compete and consumed a lot of capital.
Citigroup is still working to exit Banamex, its highly profitable consumer franchise in Mexico. It’s a complicated process that has already taken much longer than expected after failing to sell the division outright. Citigroup will soon spin off its systems from Banamex, then take part of the division public sometime next year or in 2026 and look to sell the remaining parts of Banamex over time.
It is a lengthy process, but one that must free up significant capital. Citigroup already has a lot of excess capital, but it could reduce its capital position over time as bank capital rules are finalized and the regulatory landscape becomes easier on banks under the incoming Trump administration. Citigroup is already buying back shares, a move that is extremely beneficial while the stock is trading below its tangible book value (TBV), or its net worth.
While Citigroup’s peers are currently trading closer to twice TBV – and in some cases even more – Citigroup is trading below 80% of TBV. On average, the bank has traded at 83% of TBV over the past ten years. As the bank becomes simpler and focuses on companies with higher returns, it should be able to close this gap.
The shares are trading near $71 and the tangible book value is already almost $90, so a valuation of 1.25 TBV, which is still well below peers, results in a share price of $113 and management can increase TBV through more buybacks , while the shares trade below the TBV.
Now, some investors might view Citigroup as a value trap, which would be fair given its long history of underperformance. However, Buffett has invested in most of Wall Street’s major bank stocks at some point in the 21st century. But until 2022, Berkshire had not owned Citigroup since 2001, according to SEC filings.
Buffett and his team clearly think things are different this time, and so do I. Citigroup also has a dividend yield of over 3%, so there will be passive income while you wait for the bank to transform.
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*Stock Advisor returns December 2, 2024
Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has positions at Bank of America and Citigroup. The Motley Fool holds and recommends Bank of America. The Motley Fool has a disclosure policy.
2 Warren Buffett Stocks to Buy Hand Over Fist in December was originally published by The Motley Fool
