Which Stock Has the Most Upside? Warren Buffett is known as the “Oracle of Omaha” for his ability to read the market, but his company Berkshire Hathaway (NYSE:BRK.A) is not doing anything impossible to figure out.
His main objective is investing in assets with upside potential – the firm buys investments that are undervalued at a low price and holds them for dividends until selling for a profit. When the stock market crashed in 2020, Berkshire Hathaway upped its cash holdings to a record-setting $137 billion.
Buffett famously believes cash builds a moat around a company that protects it from corporate invaders. He hates holding too much though.
Cash doesn’t generate as much value as other investments, so it quickly relieved itself of over $10 billion the same way it divests much of its $80+ billion annual profits. The company continuously finds investments that will help fuel its cash-generating machine.
So, which stock has the most upside? Remarkably, the answer might be Berkshire after a close examination.
Free Cash Flow Is Everything
Whether it’s from the likes of Bill Ackman, Kevin O’Leary, or Buffett himself, there’s no shortage of advice floating around the internet from successful billionaire investors on how to analyze a company.
Each will you that what ultimately matters is the company’s cash flow, and we saw this principle highlighted in an extraordinary way when the market crashed in the onset of the 2020 novel coronavirus pandemic.
Businesses across a wide swath of industries – including gyms, retailers, and bars – felt the impact of widespread municipal shutdowns. This led businesses of all shapes and sizes to learn they have a large workforce they can’t afford to pay without generating revenue. And without paying these employees (many cases even if you did), you can’t generate pre-coronavirus profits.
Although Berkshire Hathaway doesn’t like to have a lot of cash, it does like to have enough on hand to weather any potential storms. This is why its employees weren’t stressed about the company going insolvent at a time when it seemed like every company on the block was having trouble keeping its doors open. Cash is king, and there’s no time better than now for this to be apparent to even the smallest of investors.
This is why you can invest in Buffett’s own cash machine instead of trying to follow in its massive footsteps. In fact, Buffett himself isn’t buying stocks in 2020’s turbulent market, which is a good reason to pay attention.
What Stock Has the Biggest Upside?
While share prices increase a company’s market value to make it worthy of media headlines, it’s not an indicator of a company’s upside. In fact, the Dotcom and Bitcoin bubbles taught us major companies can have a large market value that’s highly overvalued. Take Uber (NYSE:UBER) for instance – the company has a share price of $30-50, despite never having turned a profit.
Berkshire Hathaway never invested a penny in Uber because it doesn’t have the potential upside of investments it likes. If anything, the company seeks undervalued stocks that can deliver massive returns.
We saw this in the aftermath of the 2017 financial crisis when Buffett scooped up Dow (NYSE:DOW, now trading as NYSE:CTA-B), Goldman Sachs Group (NYSE:GS), and General Electric Co. (NYSE:GE) for massive gains when everyone else was losing.
In fact, Buffett’s investment in the transportation industry comes in the form of the railroad industry. When the company bought Burlington Northern Santa Fe for $26.5 billion back in 2010, it gave him a large foothold in the industry where it already held stakes in the competition. The sector rewarded him with a constant flow of cash, much like his other revenue-generating investments.
That’s the theme that reverberates throughout this article, because it’s an important part of business. No matter what you want to invest in, it takes cash.
If you don’t have cash to invest, it doesn’t matter if you can pick out the next Tesla, Facebook, or Google. It’s ultimately the smart allocation of cash that creates a massive upside for stocks like Berkshire Hathaway.
Of course, it’s not the only game in town – aside from angel investors mentioned above, there are plenty of others who understand the keen financial savvy it takes to win on the market.
How to Find A Stock with the Most Upside?
While Berkshire Hathaway stock has a lot of upside, it’s not the only game in town. Companies like Alphabet Inc (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), and Apple Inc. (NASDAQ:AAPL) all have solid track records. These companies have a history of generating revenue and holding cash in their coffers, while still paying generous dividends to investors.
All four of these companies check every box you want to see in a company – people, process, and products, to quote Camping World (NYSE:CWH) CEO Marcus Lemonis.
Of course, the reason he looks for those three key ingredients is because he wants to generate profits, the namesake of his CNBC show. As an investor, that’s exactly what you want to mine out of your investments too.
Stocks with a big upside aren’t necessarily the ones with the highest market value. Although the three tech companies above are certainly huge, they got there by providing value to customers. When the covid-19 pandemic hit, we turned to technologies like smartphones, ecommerce marketplaces, cloud-based applications, and streaming content.
Investing in a company like Amazon or Apple is a safe bet in the post-coronavirus economy. Many people are still stuck at home, and their infrastructure will fuel the virtual businesses that thrive in the ashes of this economic crisis. If you don’t have the market savvy of the Oracle of Omaha, you can always just follow his lead. While in this case that involves shoring up cash instead of investments, you’d do well to simply invest in him.
It could prove to be a safe place to store your money than banks when the government’s stimulus protections inevitably expire.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.