2 Warren Buffett Stocks to Buy, 2 to Avoid

Given recent market trends and the rising significance of the healthcare industry, Warren Buffett has been betting on AbbVie (ABBV) and Merck (MRK), as revealed in Berkshire Hathaway's latest 13F filing. However, we think the macroeconomic and exogenous headwinds faced by Chevron (CVX) and Charter Communications (CHTR)—which are also held by Berkshire—make them best avoided now. Read on.

Warren Buffett is one of the world’s most respected investors. He is known for his value investing strategy, in which he advocates a buy-and-hold approach whereby investors hold their positions for a prolonged period to benefit from rising share prices over the long term. Buffett’s latest bets have been in the healthcare industry--an industry he believes has immense growth potential given the technological integration and breakthrough developments made by several companies to treat critical diseases.

Berkshire Hathaway’s biggest holdings in the healthcare industry are AbbVie Inc. (ABBV) and Merck & Co., Inc. (MRK). These leading biopharma companies are poised to grow significantly in the near term as they expand their drug pipelines.

However, Buffett has been reducing his exposure in several stocks, including  Chevron Corporation (CVX) and Charter Communications, Inc. (CHTR). Surging volatility in oil prices since the beginning of the year has caused a decline in CVX's operating margin in its last reported quarter. In CHTR’s case, the rising demand for over-the-top (OTT) platforms in lieu of traditional cable services has made CHTR less attractive.

Stocks to Buy:

AbbVie Inc. (ABBV)

ABBV is known for its diversified pipeline of therapies for treating critical ailments. Berkshire Hathaway  held  a $2.74 billion stake in the company, as of March 31,  making ABBV its 15th largest holding. Shares of ABBV have gained 24.8% over the past year, and 8.4% year-to-date.

ABBV’s wholly owned subsidiary, Allergan Aesthetics, acquired Soliton and Resonic on May 10. Soliton and Resonic’s rapid acoustic pulse device received FDA approval by demonstrating success in 92.9% of subjects. This should boost ABBV’s revenues significantly in the coming months.

In  April, ABBV’s VENCLYXTO drug, which is used for the treatment of myeloid leukemia, received a positive opinion from the Committee for Medicinal Products for Human Use of the European Medicines Agency. Its HUMIRA drug for treating pediatric patients received approval from Health Canada in April too.  These developments illustrate ABBV’s innovative drug pipeline, which is expected to gain commercial success soon.

ABBV’s non-GAAP adjusted net revenues increased 50.1% year-over-year to $12.94 billion in the fiscal first quarter ended March 31, 2021. Its operating income improved 13.9% from its  year-ago value to $4.10 billion, while its net income rose 18% from the prior year quarter to $3.56 billion. Its adjusted EPS came in at $2.95, up 21.9% from the same period last year.

A $3.08 consensus EPS for the current  quarter, ending June 2021,  indicates a 31.6% improvement year-over-year. The company has an impressive earnings surprise history; it  beat the Street’s EPS estimates in each of the trailing four quarters. Analysts expect the company’s revenues to rise 34.9% year-over-year to $13.60 billion in the current quarter.

It’s no surprise that ABBV has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ABBV has a B grade Growth, Value, and Quality. Of  229 stocks in the Medical – Pharmaceuticals industry, ABBV is ranked #12.

In addition to the grades I’ve highlighted, click here to view ABBV Ratings for Sentiment, Stability and Momentum.

Click here to checkout our Healthcare Sector Report for 2021

Merck & Co., Inc. (MRK)

MRK specializes in developing and commercializing pharmaceutical products in the fields of oncology, immunology, neuroscience and other serious ailments. Buffett's Berkshire Hathaway (BRK.B) held $1.38 billion worth of MRK stocks, as of March 31, 2021.

On May 6, the DA approved MRK’s KEYTRUDA drug, combined with trastuzumab, to treat patients with adenocarcinoma. Its investigational pneumococcal vaccine V114 reported positive topline results from  phase three clinical trials in the same month. The company’s drug candidate for treating breast cancer has also shown promise, MRK’s innovative drug pipeline should allow it to strengthen its position in the biopharma industry.

For the first quarter, ended March 31, 2021, MRK’s revenues increased slightly from their year-ago value to $12.08 billion. Its net cash from operating activities came in at $1.79 billion, representing a 153.3% improvement year-over-year. And its comprehensive income attributable to MRK increased 5.6% from the prior year quarter to $3.19 billion.

The Street expects MRK’s EPS to rise 16.1% from the same period last year to $1.59 in the fiscal second quarter ending June 30, 2021. The company’s revenue is expected to come in at $12.61 billion for the current  quarter, indicating a 16% improvement from its  year-ago value.

MRK has gained 3.4% over the past year to close yesterday’s trading session at $79.18.

MRK has an overall B rating, which equates to Buy in our proprietary rating system. It has a B grade  for Value, Stability and Quality. In addition, it is ranked #15 in the Medical – Pharmaceuticals industry.

Beyond what we’ve stated above, click here to view MRK Ratings for Momentum, Sentiment and Growth here.

Click here to checkout our Healthcare Sector Report for 2021

Stocks to Avoid:

Chevron Corporation (CVX)

CVX is an integrated energy and chemicals company that operates through two segments—Upstream and Downstream. It specializes in petroleum mining, refining and liquefaction operations. However, Buffett had been reducing his position in CVX in the initial months of 2020. Berkshire Hathaway held  $2.48 billion worth of CVX stock  as of March 31, 2021. The stock has gained 13.1% over the past year, and 23.3% year-to-date.

The company acquired Noble Midstream on May 11, and by so doing  strengthened its position in the DJ and Permian basin. However, this transaction is being investigated by the Rigrodsky Law P.A. for possible breach in fiduciary duties and other violations, as announced by the law firm in March. A similar investigation is being conducted by the Bragar Eagel & Squire, P.C.

CVX previously fought a climate change lawsuit issued by the City of New York for damages allegedly caused by the company’s greenhouse gas emissions. Though the charges were later rejected, CVX’s potentially polluting operations make it susceptible to similar lawsuits in the future.

CVX’s revenues came in at $32.03 billion for the fiscal first quarter ended March 31, 2021, indicating a 1.7% improvement year-over-year. This can be attributed to a 4.6% rise in Sales and other operating revenues. However, EBT declined 47.5% from the year-ago value to $2.18 billion. Its net income came in at $1.40 billion, indicating a 60.1% decline from the same period last year. Its EPS slumped 62.7% from the prior year quarter to $0.72.

CVX’s EPS is expected to decline at a rate of 4.9% per annum over the next five years.

CVX has a grade of D for Value, Sentiment and Momentum. it is ranked #74 of 92 stocks in the Energy – Oil & Gas industry.

We have also rated CVX for Growth, Stability and quality. Get all CVX Ratings here.

Charter Communications, Inc. (CHTR)

CHTR is a broadband and cable operator that serves residential and commercial customers in the U.S.  The company has an ISS Quality Score of 9, indicating high governance risk. Buffett had a $3.22 billion stake in CHTR as of fiscal first quarter, ended March 31, 2021.

CHTR has issued multiple senior notes over the past couple of months to finance its operations. The company has raised approximately $5.80 billion through secured senior notes offerings, and $1.75 billion through unsecured notes since March. The company’s high debt load indicates substantial credit risk.

CHTR’s revenues from its  Voice segment declined 12.8% year-over-year to $399 million in the fiscal first quarter, ended March 31, 2021. Its advertising sales fell 5.8% from the same period last year to $344 million. Its operating expenses stood at $7.58 billion, up 3.2% from the year-ago value. Also, its cash and cash equivalents balance declined 22.9% sequentially to $772 million.

Analysts expect CHTR’s revenue and EPS to rise 7.9% and 32%, respectively, to $12.62 billion and $4.79 in the current quarter, ending June 2021. CHTR has gained 34% over the past year, and 4.7% year-to-date.

CHTR has a D grade for Value and Sentiment. Of the nine stocks in the Entertainment – TV & Internet Providers industry, CHTR is ranked #6.

Click here to view additional CHTR Ratings for Quality, Momentum, Growth and Stability.

ABBV shares rose $0.19 (+0.16%) in premarket trading Monday. Year-to-date, ABBV has gained 11.43%, versus a 11.95% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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