2 Warren Buffett Stocks That Could Go Parabolic

Billionaire Warren Buffett has delivered a 20% average annual return to the shareholders of Berkshire Hathaway (BRK.A 0.20%) (BRK.B 0.15%) from 1965 through Dec. 31, 2021. At that rate, a dollar doubles every four years, which isn’t easy to accomplish. You can stack the odds in your favor, however, by following in the Oracle of Omaha’s footsteps.

While many of Berkshire’s holdings are slow-growing stalwarts, such as Coca-Cola and American Express, a few have the potential to deliver above-average returns. Paramount Global (PARA -2.06%) (PARA.A -2.02%) and HP (formerly Hewlett-Packard) (HPQ -2.87%) are two recent additions to Berkshire’s stock portfolio that could outperform the broader market. These two stocks sell for single-digit price-to-earnings ratios and could double your money within the next four years.

1. Paramount Global

Share prices of Paramount are down 38% over the last year, underperforming the S&P 500‘s drop of 6%. That has brought this top media company’s valuation down to just nine times forward earnings estimates. That’s very cheap, considering the average valuation of stocks that comprise the S&P 500 index trade at a price-to-earnings ratio (P/E) of 21. 

Berkshire Hathaway reported a new position in Paramount in the first quarter. The smaller position size relative to large positions like Coca-Cola means the shares were likely selected by one of Buffett’s investing deputies, Todd Combs or Ted Weschler. These managers were overseeing about $34 billion of Berkshire’s investments at the end of 2021. A review of Paramount’s recent business performance sheds some light on why the stock made the cut for these guru investors recently.

Paramount’s diversified business across direct-to-consumer (Paramount+ and Pluto TV), movies, and TV media (CBS, MTV, Comedy Central, etc.) is driving impressive growth for the company. Across all media channels, revenue was up 19% in the second quarter. That was largely driven by a 67% increase in revenue from streaming services.

However, Paramount’s momentum starts at the box office. Top Gun: Maverick just broke Titanic‘s (1997) record as the company’s top-grossing domestic film of all time. Top Gun follows several No. 1 hits at the box office for Paramount this year, including Scream, Jackass Forever, The Lost City, and Sonic the Hedgehog 2. These releases drove filmed entertainment revenue up 36% in the first half of the year. 

Success at the box office is a key part of Paramount’s strategy. It creates exclusive content that ultimately drives demand for subscriptions on Paramount+, which added 4.9 million subscribers in the second quarter, bringing the company’s total subscriber base to nearly 70 million. 

It’s obvious why the company changed its name from ViacomCBS to Paramount Global. It’s a top studio with a 110-year history, and management has major growth ambitions. Combine strong growth in the business with the stock’s single-digit P/E ratio, and it becomes clearer why the stock could double in value over the next four years.

Even without considering Paramount’s growth prospects from streaming, shareholders could see their investment double if the market awards the stock an average valuation of 21 times trailing earnings.

2. HP

HP is another value stock in Berkshire’s portfolio that could rocket higher over the next four years. The key return catalyst for investors is centered around the computing company’s improving profitability and capital returns to shareholders, which are underappreciated by the market right now.

HP isn’t growing very quickly, but revenue has remained stable in a difficult economic climate. HP experienced an acceleration in revenue growth in 2021, as people continued investing in computers and productivity solutions for working at home. Following a 12% increase in 2021, revenue has slowed in 2022, but fiscal second-quarter revenue was still respectable, up 4% over the year-ago quarter.

Most importantly, adjusted earnings per share grew 16%, driven by a reduction in the share count from share repurchases and margin improvement. Buffett has long been a fan of companies that regularly buy back their shares. It reduces the total shares outstanding and therefore increases each shareholder’s percentage ownership of the business.

HP is doing much more to generate shareholder returns than share repurchases. Management is shifting resources away from lower-margin businesses toward areas that generate higher profits, such as industrial graphics, 3D printing, printing services, and gaming peripherals. 

As HP shifts resources to more profitable markets, it’s still returning all free cash flow to shareholders. Over the last year, HP paid out 18% of its free cash flow in dividends, bringing the dividend yield to 2.81%. 

Investors get an above-average yield, along with a cheap stock to begin with. HP currently trades at a price-to-earnings ratio of 7.9, which is even cheaper than Paramount. At these levels, it’s quite possible investors could double their money if the market decides to award HP a higher valuation of, say, 16 times earnings. 

HP’s top brand, low valuation, capital returns, and high dividend yield all help explain why the stock is a core position in Berkshire’s portfolio.

American Express is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and HP. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $47.50 calls on Coca-Cola, short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.