In investing, you don’t get to be called the Oracle of Omaha without dishing out a few pearls of wisdom.
Berkshire Hathaway CEO Warren Buffett has done that — and then some — over his 60-plus year career. Along the way, he’s made a fortune for himself and early investors in his conglomerate, and his track record is unmatched by anyone over such a long period of time. Berkshire has doubled the annual return of the S&P 500 at 19.8%, versus 9.9% for the broad market. Thanks to the magic of compounding, that means Berkshire’s all-time returns have trounced those of the S&P 500.
In other ways, it pays to follow Buffett’s lead. Of the 51 stocks that Berkshire Hathaway owns, there are three that Wall Street is particularly bullish on as well. According to the consensus price target for each of these stocks, these three are expected to gain 34% or more over the next year.
Image source: Motley Fool.
1. General Motors (56% upside)
Berkshire slashed its stake in General Motors (GM -0.57%) in the second quarter by 45%, selling 18 million shares of the veteran carmaker. Buffett’s conglomerate has owned shares of the automaker for more than a decade, but the results have been disappointing. While GM seems to be making smart moves to position itself for the future, investors have instead fawned over pure-play EV stocks like Tesla, leaving legacy auto stocks like GM stuck with single-digit earnings multiples, essentially betting that there’s no growth left for these companies.
However, Wall Street seems to think otherwise. Of the 15 analysts who have issued price targets on GM in the last three months, the average one thinks GM will gain 56% over the next year. Taking a look at what GM has to offer, it’s not surprising to see so much bullishness on the stock.
The company is investing $35 billion globally in electric vehicles (EVs) and autonomous vehicles (AVs) through 2025, and its new Ultium battery cells can deliver a driving range of more than 300 miles on a full charge. They’re also modular, giving the company a unique advantage and allowing it more flexibility in vehicle body types than competitors.
Additionally, GM is also well-positioned in the autonomous vehicle race thanks to its 80% ownership of Cruise, the AV start-up it first invested in starting in 2016 and which is currently operating on the streets of San Francisco.
GM’s efforts in EVs and AVs have yet to have an impact on the bottom line, but if they do or if investors see the profit potential from these new business lines, the stock could take off.
2. Amazon (40% upside)
Amazon (AMZN 0.91%) isn’t your classic Buffett stock by any means, as the tech giant has had an unconventional path to success, sacrificing profits for much of its history to become one of the most valuable companies in the world.
Buffett is a professed admirer of Amazon founder Jeff Bezos, lauding the former Amazon chief on more than one occasion, but Berkshire did not buy Amazon stock until 2019, as its earlier lack of profits likely kept Buffett away.
Today, the company is generating billions in profit each quarter, thanks largely to the success of Amazon Web Services, the market-leading cloud infrastructure business.
Amazon has long been a favorite on Wall Street, so perhaps it’s not surprising that the average of 41 analysts covering the stock expects it to climb 40% over the next year.
The tech giant was a big winner during the pandemic, but the stock crashed in 2022 as revenue growth slowed and profits shriveled up. Even after the stock has surged this year, it’s still down 32% from its peak in 2021.
However, it’s clear why Wall Street thinks Amazon could still have significant upside. New CEO Andy Jassy has taken an ax to the company’s many unprofitable business lines and laid off 28,000 employees in an effort to drive increased profitability. The company is also unlocking new profit streams like showing ads on Prime Video, opening up the possibility of adding billions of dollars a year in what’s essentially cost-free revenue.
The stock is still expensive according to traditional metrics, but Wall Street seems to sense that Amazon is about to flip the profit switch. If the macroeconomic environment starts to improve, a 40% gain in the next year seems well within reach.
3. D.R. Horton (34% upside)
Berkshire surprised investors back in August when its 13-F filing revealed that it opened new stakes in three homebuilding stocks: NVR, Lennar, and D.R. Horton (DHI -1.33%).
Of the three, Wall Street is the most bullish on D.R. Horton, forecasting a 34% gain over the next year, according to the consensus of the 14 analysts covering the stock. D.R. Horton is also the biggest homebuilder stock in the country by market capitalization.
The combination of surging mortgage rates, a national housing shortage estimated at 4 million homes, and the rock-bottom mortgage rates Americans captured during the pandemic has created a dream scenario for homebuilders.
Housing inventory has become unusually low, as current homeowners are reluctant to sell and lose their low mortgage rates, which has helped fuel soaring demand for new homes from homebuilders.
In its most recent quarter, D.R. Horton’s revenue was up 11% to $9.7 billion, operating margin was 18.3%, and net sales orders jumped 37% to 22,879.
D.R. Horton stock is still cheap, trading at a price-to-earnings ratio of just 7.6, a sign investors expect the current bump to fade. However, the Federal Reserve just told investors it expected interest rates to stay higher for longer, which would seem to favor D.R. Horton and its homebuilding peers. Higher rates should help keep existing home inventory low, supporting demand for the homebuilder’s services and further appreciation in the stock price.
