Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett didn’t become a legendary investor by chasing stocks that everyone else likes. Rather, his fortune was built on opportunities that many traders aren’t talking about now but will be chattering about in the coming years.
Thus, when Berkshire and Buffett own a stake in a company you’ve never considered before, it can point to an under-the-radar opportunity with strong growth potential. You may have to open your mind and think outside the box to take advantage of one particular Berkshire holding, but bear in mind that the best hidden gems aren’t necessarily contained within your home country’s borders.
Not the EV stock you were expecting
If Buffett were to delve into electric vehicle (EV) stocks, which ones would he choose? What about Tesla (NASDAQ:TSLA) or Nio (NYSE:NIO), since those are the obvious choices in the U.S. and China? However, investors should again keep in mind that Buffett doesn’t always choose the most obvious stocks.
Here’s one that you probably never would have guessed. Berkshire Hathaway owns shares of BYD (OTCMKTS:BYDDY), a China-based EV manufacturer. Granted, Berkshire recently sold 820,500 shares of BYD stock, but that only slightly reduced the company’s stake from 8.05% to 7.98%.
Since BYD is a Buffett-backed stock, you might assume it’s a deep-value investment. This is difficult to measure, however. BYD has a GAAP trailing 12-month price-to-earnings (P/E) ratio of 22.8, which doesn’t appear to be extremely high. However, it’s significantly above the sector median P/E ratio of 15.5.
At least BYD looks like a better value than Tesla, which has a P/E ratio of 70.96. As for the popular Chinese EV maker Nio, it doesn’t even have a P/E ratio as it’s not a profitable company. In contrast, BYD is profitable and has been that way for a long time.
Buffett once quipped that his favorite hold time for stocks is “forever.” Thus, even after selling a relatively small number of BYD shares, evidently he envisions a strong long-term future for BYD.
Sure, China faces challenges amid an uneven post-COVID-19 recovery. On the other hand, China’s government strongly supports its clean-energy goals.
Consequently, there’s room for more than one EV manufacturer to thrive in China. Could BYD be the next breakout EV star that U.S. investors will clamor for in 2024?
A focus on affordability
By now, you’ve surely heard about Tesla’s series of price cuts. This strategy has helped Tesla maintain its dominance in the global EV market by making its vehicles more affordable and thereby boosting sales.
In other words, getting more Tesla vehicles on the roadways through a price-reduction strategy has been a smart move overall. However, it does have a downside, since lower EV prices mean lower profit margins.
While Tesla garnered attention for offering more affordable EVs, it’s not the only company that’s using this strategy.
As Counterpoint Research analyst Soumen Mandal pointed out, “At present, BYD’s primary focus is on brand proliferation rather than optimizing profit margins.”
According to a Reuters report from September, Tesla’s most basic Model 3 EV starts from around $57,500 in Thailand. Meanwhile, BYD’s Atto 3 EV model starts at about $30,000 in Thailand and is a bestseller in the region.
Therefore, if you like Tesla’s EV price cuts, then you’ll definitely want to check out BYD. Affordability may be the key to widespread global adoption of clean-energy vehicles, and BYD is among the leaders in making EVs accessible to the emerging middle class.
Huge sales and profit growth
Finally, Buffett likes a good value, but he also appreciates a business with robust growth. As it turns out, BYD also checks that box, as its third-quarter financial stats point to an EV maker in hyper-growth mode.
In Q3 2023, BYD’s revenue rose 38.5% year over year to ¥162.15 billion. Even more impressively, BYD’s quarterly net profit surged 82.2% year over year to ¥10.41 billion (US$1.42 billion), marking a quarterly net-profit record for the company.
Moreover, even while BYD sells comparatively affordable EVs, its third-quarter gross profit margin came in at 22.12%. For comparison, Tesla’s gross margin was 17.9% during the quarter that ended in September.
Clearly, BYD is making headway, even while China and other nations face economic challenges. Hence, it’s starting to become clear why Buffett likes BYD and would choose to invest in this EV manufacturer. Thus, if you appreciate the global new-energy vehicle movement and want to give a Buffett-favored business a try, feel free to conduct your due diligence on BYD and BYDDY stock.
