With tech stocks leading the market last year, shares of Berkshire Hathaway (BRK.B) underperformed. The stock gained a paltry 2.4% in 2020, compared with a 16.3% gain for the S&P 500. But this year, the BRK.B has performed much better, up 18% so far year to date. While investors might think it’s time to jump into BRK.B, there are better options.
While things are improving for Warren Buffet’s company, BRK.B has a Neutral Rating in our POWR Ratings system. Investors would be better off with stocks that fit his philosophy and are rated a Strong Buy or Buy in our POWR Ratings system. To find these stocks, I used the investment strategy outlined in Buffettology, a book written by Buffett’s ex-daughter-in-law, Mary Buffett.
These stocks have a 10-year track record of generally increasing EPS, long-term debt not more than five times annual earnings, average ROE over the past ten years of at least 15%, average ROIC over the last ten years of at least 12%, and earnings yield higher than the long-term Treasury yield. When we filter for stocks with Buy ratings or higher, we get companies such as Target Corporation (TGT), Foot Locker, Inc. (FL), and Williams-Sonoma, Inc. (WSM).
Target Corporation (TGT)
TGT is a leading U.S. general merchandise retailer, offering various products across several categories, including beauty and household essentials, food and beverage, home furnishings and decor, and apparel and accessories. It has a significant e-commerce presence and owns Shipt, an online same-day delivery platform.
The company has been benefiting from consumer stimulus and problems among small businesses and mall-based retailers. This has led to market share gains in many categories, including Apparel, Home, Hardlines, Beauty, Essentials, and Food & Beverage. In addition, TGT has been making investments to enhance its omnichannel capabilities, such as same-day delivery of in-store purchases.
TGT also plans to invest $4 billion per year over the next few years to ramp up store openings, remodels, fulfillment services, and enhance its supply chain. The company is expected to continue to gain from in-store sales growth and e-commerce sales growth. TGT has an overall grade of A, which translates into a Buy rating in our POWR Ratings system.
The company has a Sentiment Grade of B as the stock is well-liked by Wall Street analysts. Twenty-five out of thirty-one analysts currently have a Strong Buy or Buy rating on the stock. TGT also has a Quality Grade of B due to a solid balance sheet. The company had $7.8 in cash as of the end of April, compared with only $1.1 billion in short-term debt. TGT also has a ROIC of 23.9%
We also provide Growth, Value, Momentum, and Stability grades for TGT, which you can find here. TGT is ranked #1 in the A-rated Grocery/Big Box Retailers industry. For more top stocks in that industry, click here.
Click here to check out our Retail Industry Report for 2021
Foot Locker, Inc. (FL)
FL has been on a tear this year. The stock is up almost 50% in 2021. The company sells athletically inspired shoes and apparel. It operates thousands of retail stores throughout the United States, Canada, Europe, Australia, and New Zealand. Its store names include Foot Locker, Champs, and Runners Point. FL also has an e-commerce business where it sells merchandise through Footlocker.com, Eastbay, and Final-Score.
The company has been investing in expanding its digital presence by growing its e-commerce platform and direct-to-consumer operations. For instance, it activated a Shop My Store feature on its website and added Apple Pay and Google Pay as digital payment options. This has paid off in the first quarter as its direct-to-consumer segment generated 44.2% in sales growth.
FL is also looking to grow its kids’ and women’s businesses and grow internationally. The company has already seen strong growth in the Asia Pacific region. FL has an overall grade of A, which is a Strong Buy rating in our POWR Ratings system. In addition, the company has a Growth Grade of A, which isn’t surprising as EBITDA has grown over 100% in the past year. Earnings are also up 216% over the past year.
Earnings are forecasted to rise 101.8% this year. FL also has a Momentum Grade of A due to its performance in the past year. The company also has a Value Grade of A, which makes sense as it has a trailing P/E of 10.26 and a forward P/E of 12.72. Its price-to-sales ratio of 0.7 is also well below the industry average.
To access FL’s Stability, Sentiment, and Quality Grades, click here. FL is ranked #1 in the A-rated Athletics & Recreation industry. For more top stocks in this industry, click here.
Note that FL is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.
Williams-Sonoma, Inc. (WSM)
WSM is a leader in the $112 billion domestic home furnishings category. Its namesake, Williams-Sonoma, offers high-end cooking essentials, while Pottery Barn provides casual home accessories. Its brand extensions include Pottery Barn Kids and PBteen. West Elm is an emerging concept for young professionals, and Rejuvenation offers lighting and house parts.
The company has been benefiting from higher-than-expected e-commerce traffic and robust demand in Canada. In fact, it has been acquiring new customers at a record rate through its digital channels. Its digital-first channel strategy is expected to continue to generate profits as the company has shifted its advertising spend toward social media campaigns.
WSM has a history of increasing its market share. This is expected to continue as the company capitalizes on secular changes such as digitalization and remote works trends. Management is also targeting higher-income demographics. The company has an overall grade of B and Buy rating in our POWR Ratings system.
WSM has a Momentum Grade of A as the stock has shown bullish momentum over the past year and year to date. The stock is up almost 50% in the past year. The company also has a Quality Grade of A due to its rock-solid balance sheet. WSM has a current ratio of 1.3, which indicates it has more than enough liquidity to handle short-term obligations. The company also has a debt-to-equity ratio of 0.8 and an ROIC of 33.5%.
For all of WSM’s grades, including Growth, Value, Stability, and Sentiment, click here. WSM is ranked #14 in the A-rated Home Improvement & Goods industry. For other top-ranked stocks in this industry, click here.
Discover Today’s Best Value Stocks
This article was written by David Cohne, Chief Value Strategist for StockNews.com. David has helped investors find the most profitable stocks for over 20 years.
If you would like to see more of his best value stock ideas, then click the link below.
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BRK.B shares were trading at $273.22 per share on Thursday afternoon, down $6.02 (-2.16%). Year-to-date, BRK.B has gained 17.83%, versus a 15.56% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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