2 battered Warren Buffett stocks poised for epic comebacks

The 2022 bear market hasn’t been kind to Warren Buffett’s diversified holding company, Berkshire Hathaway (BRK.A -0.20%) (BRK.B -0.35%). Although Buffett and his team are world-class stock pickers, 84% of the conglomerate’s stock holdings are currently in the red for the year. In fact, Berkshire Hathaway’s various stocks have generated an average return of capital of minus 14% over almost 10 months in 2022. This speaks to the widespread impact of this bear market.

However, Berkshire Hathaway rarely lacks long-term stock picks. Between 1964 and 2021, he delivered a jaw-dropping total capital return of 3,641,613%, and one of the main reasons he was able to do this is because Buffett maintained a laser-like focus on owning money. high quality companies with exceptional management. teams. So while this sour market may not be rewarding deep value right now, this key aspect of most of Buffett’s stock picks almost always shines through over multi-year holding periods.

Image source: Getty Images.

How can investors use this information? Well, Berkshire Hathaway’s two worst-performing stocks this year are the luxury furniture retailer HR (HR -3.16%) and the developer of the cloud-based data platform Snowflake (SNOW -2.89%). The common theme among Berkshire Hathaway holdings is that they tend to be packed with deep value, and these Buffett stocks are no exception. Here’s why they might be set for some epic turnarounds in the not-too-distant future.

RH: A “Tale of two cities” stock

RH was Berkshire Hathaway’s worst performing stock in 2022, down 52.2% year-to-date. After this dramatic sell-off, however, the stock stands out as an exceptional buying opportunity for bargain hunters.

The main reason RH would make a great contrarian buy now is that its value proposition is currently misunderstood by the wider market. While it is true that RH’s core business in luxury home furnishings is somewhat sensitive to real estate market conditions, the company primarily targets high net worth clients who are able to pay cash for homes or use guarantees to take out loans at interest rates.

So even though HR revenue is expected to fall 16% over the 2022-2023 period, the market’s hasty decision to cut the stock’s forward price-to-earnings ratio by 62% – from his 52 week high – is frankly absurd. RH’s wealthy clients aren’t the ones feeling the effects of inflation or rising interest rates the most, after all.

The bottom line is that RH should continue to generate healthy levels of free cash flow even as the economy as a whole gradually slows in the coming quarters. Additionally, the company’s plans to expand into high-growth areas such as hospitality, hospitality and international markets bode well for its long-term prospects.

Finally, Wall Street analysts’ current fair value estimates for RH imply a notable upside potential of 49%. From now on, analysts’ valuation scenarios must always be taken with a grain of salt. But in this case, there is a compelling argument to be made that this luxury home furnishing stock has indeed fallen too low. A turnaround therefore seems imminent.

Snowflake: a strong growth trend

Big tech companies are gradually turning to cloud services to house and then recall large sets of data. Montana-based cloud computing company Snowflake has followed this emerging trend for the past 10 years. And while it has yet to establish a good-faith competitive moat in this crowded field, its user-friendly platform has started to land with a core of customers, resulting in a huge surge in sales lately.

In its most recent quarter, for example, Snowflake saw an 83% increase in year-over-year sales to $497 million. It is on track to become cash flow positive on a consistent basis over the next few quarters. Additionally, Wall Street expects the cloud computing player’s revenue to grow at a blistering 36.75% compound annual rate over the next three years. Yet this Buffett stock has lost 47% of its value over the course of 2022.

The Bears hammered Snowflake this year for two reasons. First, its shares were trading at more than 90 times sales at the start of this year. Tech stocks with premium valuations have been prime targets for short sellers and profit takers throughout the year. Snowflake’s premium valuation, in particular, has been called into question due to fears that larger cloud-based IT operations could slash its profit margins and rob its customers.

Second, Snowflake is still not always profitable, and this dull market has had no patience for trades that lose money.

All things considered, however, Snowflake’s stock appears to have been unfairly punished by this risk-averse market. The company’s meteoric sales growth should put it in contention to become a dominant player in massive cloud-based computing by the end of the decade. And that lightning-fast growth profile is a key reason Wall Street analysts think Snowflake shares could be 65% undervalued right now. So once investors’ fears of recession die down, this top cloud computing stock could come back strong.

George Budwell has no position in the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares), RH and Snowflake Inc. The Motley Fool recommends the following options: long January 2023 $200 on Berkshire Hathaway (B shares), short January 2023 $200 put on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.