Buffett's pick: three new stocks in Berkshire's portfolio with up to 50% growth potential

Most of the stocks Warren Buffett added to Berkshire Hathaway's portfolio in the second quarter look fairly valued or even overvalued, Morningstar analysts say. But three companies, they say, retain the potential for long-term growth and a stronger position in their industries. These are the securities of the manufacturer of alcoholic beverages Constellation Brands, one of the largest U.S. construction companies Lennar and medical corporation UnitedHealth Group.

The stock has fallen about 30% over the past year due to weak demand in recent quarters. "We believe the company has built a broad economic moat due to its strong brands and close relationships with distributors, which benefit its portfolio of Mexican beer brands, the top sellers," Morningstar analyst Dan Su said. Constellation Brands shares are trading well below fair value, he said.

The company, according to analysts, is poised to stay ahead of the competition through aggressive new product releases and marketing that strengthens the brand's position.

Morningstar maintained a $247 target price on Constellation shares after the report was released in July. Analysts' estimates suggest the company's quotations will grow by almost 49%.

The second-largest housing developer in the U.S. (after D.R. Horton) is facing challenges: potential buyers are putting off deals amid the current economic situation and high interest rates, which is holding the stock back. Nevertheless, Lennar has strengths, according to Morningstar analysts.

"Over the past several years, Lennar has focused on improving capital efficiency by increasing the percentage of land under its control through options or other off-balance sheet arrangements instead of directly owning parcels. We believe Lennar's strategy of minimizing land ownership will result in higher cash flow conversion and higher return on invested capital throughout the housing cycle," said Morningstar director Brian Bernard.

The company's stock is now worth 22% less than its fair value, which analysts estimate at $159. According to Morningstar, the market is underestimating Lennar's shift to a more flexible model - where the company does not keep large land holdings on its balance sheet, but instead utilizes options and leases. This strategy should improve free cash flow and return on invested capital throughout the economic cycle.

Berkshire's investment in UnitedHealth Group was a classic example of Buffett's "buy when others are afraid" strategy, Morningstar writes. The company's stock fell 40% in the quarter due to rising healthcare costs and an increased focus on its Medicare Advantage business. But Morningstar senior analyst Julie Utterback believes UnitedHealth will remain the leading managed care company in terms of economic profitability - and the stock still looks undervalued after Buffett stepped in.

In 2025, stocks of most companies in the MCO (managed care organizations) industry, including UnitedHealth, were under pressure, with profits falling and market sentiment worsening due to doubts about the long-term ability of these organizations to generate revenue, the bank notes. That created an opportunity for long-term investors like Berkshire Hathaway.

Even after quotes rose more than 10 percent on news of the investment, Berkshire Morningstar still believes UnitedHealth is trading at about a 25 percent discount to fair value.

This article was AI-translated and verified by a human editor