3 Value Stocks to Buy as Berkshire Hathaway Hits All-Time High on Warren Buffett’s Birthday

Berkshire Hathawayhis (BRK.A -0.99%) (BRK.B -1.18%) the stock price hit an all-time high on Aug. 30 — Warren Buffett’s 94th birthday — before continuing to rise further on Sept. 3, despite a 2.1 percent selloff in S&P 500. Shares of the conglomerate giant are now up more than 27% year-to-date, outperforming both the S&P 500 and Nasdaq Composite by a wide margin.

Its portfolio managers have been on a selling spree lately — shorting it significantly Apple the stake earlier this year and cutting it Bank of America position by 14.5% since mid-July.

However, Berkshire retained a sizeable stake in the oil and natural gas exploration and production company Occidental Petroleum (OXY -3.18%)hold American Express, Visaand MasterCard (ME -0.26%)and initiated a position in The ultimate beauty (ULTA 1.05%) earlier this summer.

Here’s why Occidental Petroleum, Mastercard and Ulta stand out as three of the best value stocks to buy right now.

Image source: Getty Images.

Oxy can make money even at mediocre oil prices

Berkshire Hathaway owns 27.3 percent of Occidental Petroleum — commonly referred to as Oxy. That stake, Berkshire’s sixth-largest public holding, is worth more than $14 billion. But Oxy hasn’t been a very good investment lately. Shares are hovering around 52-week lows.

Oil prices affect the fortunes of the entire oil and natural gas value chain, but especially exploration and production companies like Oxy, which build their businesses around selling hydrocarbons for more than it costs to get these resources out of the ground. Unfortunately for Oxy and its peers, the price of West Texas Intermediate (WTI) crude oil — the US benchmark — just fell below $70 a barrel, to its lowest level this year.

While Oxy may even get to a much lower oil price, $70 is significant because Oxy has based some of its key decisions on the assumption that prices will be at or above that level. In its fourth-quarter 2023 investor presentation, it used that threshold to forecast first-year free cash flow (FCF) from its $12 billion acquisition of CrownRock. The lower the oil price, the lower the FCF and the worse the acquisition will look — at least in the short term. The good news is that CrownRock has plenty of acreage where expected return levels are below $60 per barrel for WTI.

Oxy has also done an excellent job improving the health of its balance sheet by paying down debt. It is also aggressively investing in carbon capture and storage projects that could have long-term benefits for the company, both from an ESG (environmental, social and governance) perspective and as a potential revenue stream in the form of of carbon credits.

Oxy today trades at a price-to-earnings (P/E) ratio of 13.5 and a price-to-FCF ratio of 13 — meaning earnings and FCF could fall and the stock would still be cheap. Now is a great time to get shares of Berkshire’s largest energy company on sale.

Mastercard has a strong moat

Credit card companies have proven to be phenomenal long-term investments. Mastercard and its closest peer, Visa, now have a combined market cap of nearly $1 trillion. And yet, they are not necessarily overrated.

Mastercard now trades at a forward P/E ratio of 33.3. That’s higher than the S&P 500’s trailing P/E ratio of 28.8, so even if Mastercard generates the earnings analysts expect over the next 12 months, it will still be more expensive than the S&P 500. With Mastercard, however, the value doesn’t it is only in earnings, but the quality of the company and its growth trajectory.

Mastercard is an incredibly efficient business with an operating margin of 58.6%. It also has total net long-term debt of just $8.2 billion on its balance sheet, which is very low for a company of its size. Few companies in the S&P 500 can compete with Mastercard’s profitability and financial health.

It also benefits from a huge network effect. Mastercard and Visa process the majority of credit card transactions in the US, and both are growing internationally. Fees are collected for both the number of transactions and the payout volume of total transactions. The more Mastercard debit and credit cards in circulation and the greater the partnerships with financial institutions such as banks and credit unions, the more useful the network becomes for all participants and the more incentive other customers and businesses have to join it.

Mastercard is expanding its value-added services business as consumers and merchants look for fraud prevention tools, better analytics and cybersecurity solutions. This segment grew faster than Mastercard’s core business last quarter.

Add it all up and Mastercard stands out as a quality company that can continue to deliver strong returns for investors.

Ulta is a one-size-fits-all way to play catch-up on cosmetics

Ulta is a new addition to Berkshire’s portfolio. Although the position is valued at about a quarter of a billion dollars — far less than its other holdings — Berkshire Hathaway now owns 1.5 percent of the retailer.

Ulta checks many of the boxes that Buffett and his team look for when looking for quality stocks. The stock’s valuation is significantly below historical median levels.

ULTA PE report data by YCharts.

As you can see, Ulta’s P/E ratio is above its current P/E, which means analysts expect earnings to decline over the next 12 months. There’s no getting around the fact that Ulta’s second-quarter 2024 earnings call was dismal, with management cutting the outlook for the second time this year. Competition and weak consumer spending were the main concerns. But taking a step back, a slowdown in Ulta’s growth is completely understandable.

The cosmetics industry has experienced an expansion in recent years. And consumer trends toward more value-oriented products — such as those sold by elf Beauty — and away from premium priced products like those sold by Estee Lauder or L’oreal means lower margins and fewer reasons for customers to shop in its stores, try new products or use Ulta’s salon services.

All of this adds up to a sluggish near-term outlook for the retailer. Still, for investors with the patience to hold out while they wait for the industry to turn around, Ulta’s cheap valuation and market position are worth considering now.