Berkshire Hathaway(NYSE: BRK.B)(NYSE: BRK.A), the holding company Warren Buffett has managed since the mid-1960s, produced a healthy 15.8% gain in 2023. As is usually the case, not every component in Berkshire's $359 billion equity portfolio participated in the rally. There were a couple of stocks that finished the year significantly lower.
Buffett completely removed seven stocks from Berkshire's portfolio in the third quarter, but these two were allowed to remain despite underperforming. This suggests that he believes they have a bright future.
Image source: The Motley Fool.
Here's a closer look at both beaten-down stocks to see if they could be bargains now.
Chevron
Shares of Chevron(NYSE: CVX)fell hard in October after the company reported third-quarter revenue that was 18.3% lower year over year. The drop was largely due to lower commodity prices and a poor reaction to management's aggressive plans for expansion through acquisition. It didn't help that Berkshire Hathaway steadily trimmed its Chevron position by about one-third beginning in late 2022.
At their reduced price, shares of Chevron offer a nice 3.9% dividend yield. The company has been able to raise its payout by 26.9% over the past five years, and future raises seem highly likely. The company met its dividend commitment with just 55% of the free cash flow its operations generated over the past 12 months.
Buffett likes oil and gas stocks because markets consistently overreact to the cyclical industry's peaks and troughs. He is a particular fan of Chevron because its assets can produce strong positive cash flow even when oil prices fall.
Shares of Chevron have been trading for just 11.2 times trailing-12-month earnings. That looks like a bargain when you consider the average stock in the S&P 500 index has been trading at 21.6 times trailing earnings.
With new cuts to supply from OPEC likely to raise oil prices in 2024, buying the stock now to hold for the long run looks like the right move.
Coca-Cola
Coca-Cola's (NYSE: KO) stock price tanked last fall but recovered enough to limit its loss to just 4.8% in 2023. At recent prices, it offers a 3.1% yield, and investors who buy now can reasonably expect its dividend to keep rising. Last February, the company raised its quarterly payout for the 61st year in a row.
Buffett loves Coca-Cola because it sells some of the most recognized brands on the planet, giving it the pricing power it needs to steadily increase profits.
For example, North American case volume was flat during the first nine months of 2023, but price increases raised net revenue for this important geographical segment by 8% year over year.
The giant international supermarket chain Carrefour recently started pulling PepsiCo products in response to price hikes. So far, it hasn't complained about Coca-Cola.
Volumes in North America have held steady, and Coca-Cola products are still increasingly popular in Latin America, where reported net revenue surged 24% year over year.
Over the next few years, Coca-Cola shouldn't have any trouble raising its dividend in line with overall profit growth. The company generated $10.2 billion in free cash flow during the 12 months that ended Sept. 30. Over the same time frame, dividend payments chewed up 77% of the free cash flow that operations generated.
I wouldn't say that Coca-Cola shares are trading at bargain prices, but they aren't prohibitively expensive, either. You can buy the stock for 25.5 times trailing free cash flow or 21.3 times forward earnings expectations. It probably won't be the top performer in your portfolio, but adding some shares now will more than likely lead to positive returns and heaps of dividend income over time.
Should you invest $1,000 in Chevron right now?
Before you buy stock in Chevron, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Chevron wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 18, 2023
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Chevron and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
