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The Federal Reserve gave the stock market a shock recently as the central bank raised interest rates once again, taking its benchmark rate to its highest level in 15 years. The Fed also suggested that it would keep raising rates in 2023 to bring down inflation.
The Fed’s hawkish stance sent equities tumbling, as it was expected that the central bank would dial down rate increases in 2023 thanks to signs of cooling inflation. A high-interest-rate environment has been the stock market’s undoing in 2022. The Fed would need more proof that inflation is cooling in a sustained manner.
It could get that evidence in 2023, as inflation is expected to drop to 3.2% by the end of 2023, which would be a substantial decline from 7.1% in November 2022. So it won’t be surprising to see the Fed adopt a dovish stance as 2023 progresses. That’s why now may be a good time to buy some beaten-down stocks from Warren Buffett’s portfolio.
The Berkshire Hathaway CEO has been active in the stock market this year despite the gloom, suggesting that he’s busy putting his money to work by buying solid companies for the long run. Here are two stocks from Berkshire’s portfolio that investors may want to buy while they’re still down, as they could turn out to be big winners in the long run.
E-commerce and technology giant Amazon (AMZN 2.88%) has lost half of its value on the stock market this year. The company’s growth has lagged thanks to a slowdown in e-commerce sales on account of surging inflation.
But with inflation expected to cool down substantially in 2023, the e-commerce business can be expected to step on the gas once again. This explains why Amazon’s earnings are estimated to jump substantially next year following a sharp drop in 2022. More specifically, Amazon is expected to finish 2022 with a loss of $0.09 per share, compared with a profit of $3.24 per share in 2021, but the forecast for 2023 and 2024 shows major improvements are in the cards.
AMZN EPS Estimates for Current Fiscal Year data by YCharts
It is estimated that global e-commerce spending could rise to $6.5 trillion in 2023 from $5.7 trillion in 2022. That would be a nice improvement over this year’s estimated decline of nearly 10%. On the other hand, Amazon’s entry into a lucrative market such as advertising should be another key catalyst for the company in 2023.
Amazon’s advertising revenue jumped 25% year over year in the third quarter of 2022 to $9.5 billion. Although that was less than 10% of the company’s total revenue of $127 billion, it could move the needle in a bigger way for the company. Amazon’s 2022 ad revenue is expected to land at $38 billion. By 2026, this figure is expected to jump to $64 billion. Throw in other growth drivers such as cloud computing, an area where Amazon dominates, and it is easy to see why the company is expected to clock 26% annual earnings growth for the next five years.
So this Warren Buffett stock could run higher in 2023 and beyond, which is why investors may want to buy it right now, as it’s trading at just 1.7 times sales, which represents a discount to the S&P 500‘s price-to-sales ratio of 2.3.
Taiwan Semiconductor Manufacturing (TSM 4.02%) — better known as TSMC — is one of the latest additions to Buffett’s portfolio. The Oracle of Omaha revealed a $4.1 billion stake in TSMC recently, and it’s not surprising to see why the foundry giant has made its way into Berkshire’s portfolio.
TSMC’s 43% slide in 2022 means it’s available at an attractive valuation. TSMC is trading at less than 14 times trailing earnings. That’s lower than the S&P 500’s earnings multiple of 18. Buying this semiconductor stock at this valuation looks like a no-brainer, given the terrific growth opportunity it’s sitting on.
With TSMC’s earnings estimated to increase at an annual pace of over 21% over the next five years, investors can consider buying it hand over fist considering the cheap valuation. After all, TSMC is the world’s biggest semiconductor foundry and controls 56% share of this space, according to Counterpoint Research.
This impressive market share puts the company in a solid position to take advantage of the secular growth in semiconductors. Global semiconductor sales are estimated to exceed $1 trillion in annual revenue by 2030, up from $600 billion in 2021. Of course, analysts expect the industry to hit a speed bump in 2023, with industry revenue expected to decline 3.6%, but TSMC can sustain its impressive growth despite that.
TSMC’s revenue has jumped nearly 45% in the first 11 months of 2022 compared with the prior-year period. That’s well above the 4% growth that the global semiconductor market is expected to reach in 2022. TSMC’s diversified end markets and its dominance of the foundry market have allowed it to enjoy terrific growth in 2022, and the company’s investments in advanced technologies should help it sustain the same in the future thanks to its secular growth opportunity.
All this makes TSMC another top Buffett stock that investors may want to buy right now, as it may not be available for cheap once inflation cools down enough and the stock market possibly goes on a bull run in 2023.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Berkshire Hathaway, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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