Warren Buffett and his company, Berkshire Hathaway, have made a name for themselves by generating great returns for decades. That, coupled with the power of time and compounding, has led Berkshire’s stock to widely outperform the S&P 500, which has a good history itself.
Between 1965 and 2023, Berkshire’s stock has grown 4,384,748%, equating to compound annual gains of 19.8%. The S&P 500 has generated an overall gain of 31,223%, or a compound annual gain of 10.2% including dividends. This is why so many investors follow Buffett and Berkshire’s moves so closely, not that you shouldn’t do your own due diligence.
As we head into year-end, here are two Warren Buffett stocks to buy hand over fist in December.
Sirius XM: A great risk/reward proposition
Berkshire has been buying Sirius XM Holdings (SIRI -0.58%) all year and is now the company’s largest shareholder. Sirius has been through many changes this year. The company recently split off from Liberty Media and conducted a reverse 1-for-10 stock split, moves made to attract more institutional interest through a simplified corporate structure and higher stock price.
The stock is down more than 50% this year, struggling from a high debt load and a decline in paying subscribers. Management also lowered the company’s full-year revenue outlook due to softer ad revenue, so it has work to show investors it’s on track.
However, Sirius continues to focus on its long-term strategy of growing its subscription business. The company has paid big bucks to obtain exclusive distribution and advertising rights for podcasts with large audiences, which it hopes will help diversify its subscriber base and attract more advertisers to its platform. In the third quarter, Sirius added about 14,000 subscribers for a total of 37.4 million, including both Sirius XM and its sister platform, Pandora. It also grew podcast ad revenue by 6%.
The company’s long-term goal is to grow subscribers by 25% from 2023 and reach 50 million while increasing free cash flow (FCF) by 50% to $1.8 billion. Higher FCF will allow the company to do things like pay off debt, repurchase shares, and increase the dividend.
While the company has much to prove, the risk-reward outlook is favorable because Sirius seems detached from market fundamentals. The stock trades below 8 times earnings and has not enjoyed gains along with the broader market. It also has a dividend yield close to 4%, so investors are paid to wait.
I also expect the stock to hold up better if there were to be some kind of market correction because investors have already set low expectations.
Citigroup: A value play in a sector set to outperform
Buffett has long been fans of bank stocks. However, the last few years have been tough for the group as several prominent bank failures and an inverted yield curve decimated the sector for two years. The Federal Reserve began lowering interest rates recently, which helped to normalize the yield curve. Banks typically borrow short and lend long, so the sector performs better when the yield curve is steepening.
Berkshire sold many of its bank stocks during the pandemic and has been selling chunks of its large stake in Bank of America all year. However, it has maintained its nearly 3% stake in Citigroup (C 0.04%), which consumes 1.3% of Berkshire’s $300 billion-plus equities portfolio. Citigroup has struggled since the Great Recession and recently has been dealing with a frustrated shareholder base, an overly complex bank, and consent orders regarding the company’s internal controls.
CEO Jane Fraser took the helm of the bank in 2021 and has already accomplished a lot, including selling off most of Citigroup’s international consumer franchises, which lacked the scale to compete and consumed a lot of capital.
Citigroup is still working on exiting Banamex, its highly profitable consumer franchise in Mexico. It’s a complicated process that has already extended much longer than expected after failing to sell the division outright. Citigroup will soon split its systems from Banamex, then take a portion of the division public in an initial public offering sometime next year or in 2026, and attempt to sell the remaining parts of Banamex over time.
It’s a lengthy process but one that should free up significant capital. Citigroup already holds a lot of excess capital but can lower its capital position over time as bank regulatory capital rules are finalized and as the regulatory landscape under an incoming Trump administration gets easier for banks. Citigroup is already repurchasing shares, a move that is extremely accretive while the stock trades below tangible book value (TBV) or its net worth.
While Citigroup’s peers currently trade closer to 2 times TBV — and above in some cases — Citigroup trades below 80% of TBV. On average, the bank has traded at 83% of TBV over the past decade. As the bank becomes simpler and focuses on higher-returning businesses, it should be able to close this gap.
The stock trades close to $71 and tangible book value is already close to $90, so a 1.25 TBV valuation, which is still well below peers, results in a $113 stock price and management can increase TBV through more repurchases while the stock trades under TBV.
Now, some investors may view Citigroup as a value trap, which would be fair given the long history of underperformance. However, Buffett at one point or another has invested in most of Wall Street’s major bank stocks in the 21st century. But according to SEC filings, up until 2022 Berkshire hadn’t owned Citigroup since 2001.
Buffett and his team clearly think this time is different and I do as well. Citigroup also has over a 3% dividend yield, so there will be passive income while you wait for the bank’s transformation.
