This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

If you want to invest like a billionaire, you have to be willing to buy shares when a company is experiencing temporary problems. It's only when the near-term outlook is gloomy that you can invest in a great business below what it's worth.

Pershing Square's Bill Ackman and Berkshire Hathaway CEO Warren Buffett have executed a value-based strategy to amass multi-billion-dollar fortunes. While Wall Street chases hot tech stocks, Ackman and Buffett are finding great value in these top retail brands. Let's see perhaps why.

1. Nike

Pershing Square disclosed a portfolio of U.S.-based stocks worth $10 billion in the second quarter. It added two new stocks to the portfolio, including Nike (NYSE: NKE). Ackman's investment strategy involves buying stakes of large, profitable companies when they are on sale, and Nike certainly fits the bill. It dominates the sportswear market with $51 billion in trailing revenue -- and footwear generates two-thirds of that amount.

Nike didn't get to where it is today without plenty of ups and downs over the past 50 years. For an apparel business, revenue can falter during economic recessions or periods of soft consumer demand. High inflation and interest rates have taken a toll on the consumer over the last few years, and Nike felt the sting. The company's revenue fell 2% year over year in the May-ending fiscal fourth quarter.

Management is calling fiscal 2025 a transition year as it repositions itself for long-term growth.

Ackman's purchase is timely. Nike stock is trading at its lowest price-to-earnings (P/E) multiple since 2017. Before the recent revenue decline, Wall Street analysts were expecting Nike to grow earnings at double-digit rates over the long term. Nike can still achieve that pace.

Importantly, most of Nike's problem stems from its lifestyle products. Revenue from performance products, such as running and basketball shoes, grew at healthy rates in the quarter. Demand for fitness products was a positive contributor to the apparel business, and management likes the specific opportunity it sees in women's apparel.

The global sports apparel market is expected to reach $293 billion by 2030. That's an incremental increase of $70 billion over 2023, which is greater than Nike's annual revenue. As a leading brand with a large marketing budget, Nike will undoubtedly grow again, so buying the stock at these lower share prices could pay off handsomely in five years.

2. Ulta Beauty

Warren Buffett's company disclosed a new stake in leading cosmetics retailer Ulta Beauty (NASDAQ: ULTA) last quarter. It's another example of a great investor pouncing on an opportunity to buy an industry-leading business at a fire sale price.

The beauty industry was booming coming out of the pandemic, and it's forecast to grow over the next several years. As an industry leader, Ulta has a competitive advantage based on a wide selection of products across salon styling, skincare, fragrance, and cosmetics. It operates over 1,400 stores that are strategically positioned in high-traffic areas.

The company delivered annualised revenue growth of 15% over the past 10 years, with earnings clocking in at a robust 23% per year, which speaks to the opportunities for this leading retailer to expand and gain market share. However, comparable-store sales fell 1% year over year in the recent quarter, sending the stock down 31% off its previous high.

The strong growth in the beauty market over the last few years has brought more competition. Management noted there are more places to buy beauty products, with over 1,000 new points of distribution opened in the last few years. This has pressured Ulta Beauty's market share.

Still, Buffett or one of his investing deputies is clearly focusing on Ulta Beauty's brand and ability to use that advantage to regain market share. It starts with Ulta's loyalty program, which grew 5% year over year last quarter to 43.9 million members. Offering more value through its loyalty program is a big opportunity for Ulta Beauty to navigate the near-term headwinds in consumer spending and come out on top over the next few years.

The stock currently trades at a forward price-to-earnings ratio of 16 based on next year's earnings estimate. Ulta has tremendous long-term potential. It generates just $11 billion in annual revenue in an industry expected to reach $129 billion by 2028, according to Statista. The stock can deliver excellent returns from here.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 2 billionaire-held US stocks to buy before 2025 appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett once told investors to be "fearful when others are greedy and to be greedy only when others are fearful." That's why it was alarming when Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) started selling a lot of its top positions -- including Apple and Bank of America -- in recent months and boosted its cash holdings to a record high.

That shift suggests the market is getting overheated and heading for a pullback. That wouldn't be too surprising, since the S&P 500 only trades about 3% below its all-time high and looks historically expensive at 22 times forward earnings.

Yet Berkshire has still been buying some stocks as it prunes its other holdings. One of those stocks is the cosmetics retailer Ulta Beauty (NASDAQ: ULTA). In the second quarter, it bought 690,106 shares of Ulta for $266 million at an average price of about $406. That equals 1.5% of Ulta's shares and accounts for 0.1% of Berkshire's portfolio.

Warren Buffett isn't making any money on that new investment yet. But at $380 a share, its stock still looks ridiculously cheap at 15 times forward earnings -- and it might just bounce back once the market warms up again.

Ulta Beauty's business model

Ulta Beauty went public in 2007, and it carved out a niche with its in-store salon services, wide range of high-end to low-end products, partnerships with hot brands like Kylie Jenner's Kylie Cosmetics, and social media marketing campaigns that targeted younger customers. It also rapidly opened new brick-and-mortar stores as it expanded its sticky loyalty program.

Unlike LVMH's (OTC: LVMUY) Sephora, which was tethered to J.C. Penney's dying stores and struggling malls for years, Ulta opened big stand-alone stores. It also opened more shop-in-shops in Target's stores over the past three years.

From fiscal 2007 to fiscal 2019 (which ended in February 2020), Ulta's revenue grew at a robust compound annual growth rate (CAGR) of 19%. Its gross margin expanded from 31.1% to 36.2%, and its net income increased at a CAGR of 32%. It increased its total number of year-end stores from 249 locations to 1,254 locations.

So why did the bulls retreat?

Ulta suffered a major slowdown during the pandemic's height as it temporarily closed its brick-and-mortar stores and people bought fewer cosmetics. Yet it continued to open new stores throughout that slowdown in fiscal 2020.

The company recovered quickly in fiscal 2021 and 2022 as those headwinds dissipated, and its gross margins expanded in both years as it opened even more stores. But in fiscal 2023, its comparable stores sales growth decelerated to the single digits, its gross margin contracted, and it slightly eased off its brick-and-mortar expansion.

Data source: Ulta Beauty.

Ulta mainly attributed that slowdown to inflationary headwinds and a tougher promotional environment. At the end of fiscal 2023, it predicted its comps would grow 4% to 5% in fiscal 2024. But it cut that guidance over the past two quarters, and it now expects its comps to decline 0% to 2% for the full year. Analysts expect its revenue to stay nearly flat.

As its top line growth decelerates, Ulta plans to ramp up its own promotions and increase its investments in its new store openings, remodels, IT infrastructure, and supply chain. It expects that pressure to reduce its gross and operating margins, and analysts expect its earnings per share (EPS) to decline 10% for the full year. That's why Ulta's stock retreated more than 30% after it hit its record high of $567.18 in March.

Why is Warren Buffett investing in Ulta right now?

Ulta faces near-term challenges, but it should warm up again as the macro environment improves. It's still firmly profitable, it isn't shouldering any interest-bearing debt, and it launched a new $2 billion buyback plan (compared to its current market cap of $17 billion) this March. It still had $1.6 billion remaining in that authorization at the end of the second quarter.

Ulta also ended the quarter with 43.9 million Rewards members, which represents 5% growth from a year earlier, and it continues to open new brick-and-mortar stores. That expanding foundation could make it a great discount play at its current valuations -- so investors should consider following Buffett's lead and buying this unloved retail stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This ridiculously cheap Warren Buffett stock could make you richer appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), is known for its ability to find value in the markets. That's why when it makes a move to buy a stock, many investors often follow suit, feeling confident that Buffett or Berkshire's other managers saw some considerable value there.

On the flip side, investors may grow concerned when they don't see a lot of buying activity, and Berkshire's cash balance has been growing instead. They may be reading into that trend as a sign of cause for concern in the markets. And with Berkshire's cash balance indeed rising, should investors be worried about the stock market?

Is this a time to sell off your stocks and wait for better economic conditions?

Berkshire's cash reaches a new record

It's no secret that Berkshire Hathaway's cash balance has been growing. Every quarter, it reports on its cash and short-term investments, and in the past Buffett has suggested that he wouldn't be surprised to see the balance continue to rise. And that has indeed been happening -- its cash was at record levels of around $277 billion as of June 30.

BRK.A Cash and Short-Term Investments (Quarterly) data by YCharts.

This sharp increase in Berkshire's cash comes as the company has been selling off shares of multiple companies, including Apple and Bank of America. Tech company and iPhone maker Apple has accounted for close to half of Berkshire's holdings in the past. Today, it makes up a more modest 29% of all investments.

Is this a sign that Buffett is worried about the markets?

Selling shares of some of his top investments may seem alarming to investors, especially with recent concerns of a recession on the rise. Economic conditions are worsening, and now expectations are that the Federal Reserve will cut rates in the near future -- it's just a matter of how steep and how many cuts there will be rather than whether there will be any at all this year.

But Buffett has remained invested in stocks throughout worse and more concerning periods in the past (even wars). He doesn't sell due to economic conditions or forecasts. His stock sale of Apple, for instance, may have more to do with concerns about capital gains taxes increasing and what effect that may have on Berkshire's shareholders than anything else. There's no indication to suggest that he suddenly thinks Apple has become a worse company to invest in or that it has somehow lost its competitive moat and ability to dominate the market. It is, after all, still the top holding in Berkshire's portfolio.

What is notable is that amid all the selling of Apple and, to a lesser extent, Bank of America stock, Berkshire is simply holding onto its cash load; it isn't taking big positions in new companies. It has added Ulta Beauty to its portfolio recently, but for the most part Berkshire hasn't been buying up shares of other stocks. This could be a sign that Buffett isn't seeing tremendous buying opportunities right now, perhaps because valuations have become too inflated.

S&P 500 P/E Ratio data by YCharts. P/E = price to earnings.

Aside from 2020, which was an unusual time in the markets due to the emergence of COVID-19, the S&P 500 does appear to be trading at a fairly high valuation today. And if that weren't the case, I would certainly have expected Buffett to be buying up more stocks with all that cash on hand.

Investors shouldn't ignore valuations when picking stocks

Even if you're bullish on a company's long-term prospects, that doesn't mean you should ignore its valuation. A stock that trades at a high premium could mean it takes a while for you to earn a good return on your investment because investors have already paid for and priced a lot of future growth into its valuation. There's also minimal, if any, margin of safety that comes with stocks that are trading at high premiums.

Investors shouldn't try timing the markets or waiting for Berkshire to make big moves before deciding to buy stocks. But it would be prudent and worthwhile to consider the premium you might pay for a stock before adding it to your portfolio. If it looks excessive, it may be better to put that investment on a watchlist rather than buy it.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett is selling stocks and loading up on cash. Is that a red flag for investors? appeared first on The Motley Fool Australia.

The problem is that everywhere you turn, you see someone telling you that their strategy is the best one — and in some cases, the only one that will make you successful. With so many different ways to profit from shares, how do you decide which one is right for you?

Plenty of right answers

Perhaps the most amazing thing about investing in shares is how many different ways there are to make money. Let's take a brief look at some of the popular strategies many investors use:

Large-cap investors seek the stability of established companies with proven track records. Shares like Woolworths (ASX: WOW) and Westfield (ASX: WDC) have their fastest growth phase behind them now, but shareholders don't have to worry about them going belly-up anytime soon.

Value investors look for shares that trade at attractive prices. Like a bargain shopper waking up at 4 a.m. on Boxing Day, value investors hope to snag bargains by buying out-of-favour shares. While some beaten-down companies never recover, others, such as Flight Centre (ASX: FLT) provide stellar returns when they come back.

Growth investors focus more on companies with strong prospects for the future. Although they prefer not to pay too much, growth investors are willing to pay up for the most promising businesses. Seek (ASX: SEK) is a good example, with sales growing from $26m in 2003 to $280m in 2010.

Dividend investors value shares that pay them back with generous income streams. Dividend-paying shares like Commonwealth Bank (ASX: CBA) won't always show big price jumps. But over time, dividend investors hope to outpace their counterparts.

Small-cap investors look beyond the security of blue-chip shares to find undiscovered companies that have the potential to become the household names of tomorrow. While this strategy is somewhat riskier, small-cap investors expect the profits from their successes to outweigh the losses from failures.

What's right for you?

Stereotypes aside, however, your first investing strategy should reflect a mix of your financial goals and personal preferences. Here are some guidelines:

If you're nervous about shares, get your feet wet with a conservative strategy like value or dividend investing. The margin of safety in value shares and the steady income of dividend shares both absorb some of the shocks of market downturns.

The younger you are, the more risk you can afford to take. Those in their 20s, for instance, might want to maximize their potential returns with growth or small-cap investing. As you get closer to needing the money you're investing, moving to regular large-cap shares or more conservative strategies makes sense.

Last, although many investors identify most closely with a particular strategy, bear in mind that a well-diversified portfolio uses many strategies. Over time, you can learn about all of these strategies, helping you figure out which ones you do best with.

The best investing strategy is the one that will bring you the most success. Start with one that matches your goals, but keep an open mind as you gain experience — you might find another strategy that suits you better.

Of the companies mentioned above, Bruce Jackson has a beneficial interest in Commonwealth Bank and Woolworths. Check out The Motley Fool's disclosure policy.

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