The Buffett Effect: Analyzing 3 Stock Picks

analyzing buffett picks stocks
analyzing buffett picks stocks

Did you hear the news?

The Motley Fool (Sean Williams) published this news entitled “4 Warren Buffett Stocks That Are Screaming Buys in 2023“.

As you may already know, Mr. Warren Buffett, chairman, and CEO of Berkshire Hathaway, is one of the most well-succeeded  investors in the history of mankind. According to the book “Excess Returns” by Frederik Vanhaverbeke, Buffett managed to deliver between 10% to 15% annual excess returns in relation to the S&P 500. We’ve talked about it here.

The Figure below was taken from the book mentioned and shows the approximate excess returns vs S&P500 Index. Quite a remarkable result.

stocks excess return

The article mentioned 4 stocks as follows: Bank of America, Johnson & Johnson, Amazon, and Berkshire Hathaway. Since Buffett Berkshire is a holding composed of many other stocks, let’s take a look at the other options.

Stock #1: Bank of America (BAC)


It looks like Buffett loves banks. He has recently invested in a Brazilian fintech called NuBank (NU) that strongly focuses on the digital financial segment. The NU shares plummet over 60% since its listing, but the “Oracle of Omaha” (aka Buffett) raised the investment even more even while the market analysts set a “Strong sell” advice for NU.

I don’t know who will be right at the end, but we surely should be taking a closer look at this since it’s coming from someone that managed to beat the S&P 500 for over 50 years. Figure 1 shows some key metrics of BAC.

Bank of America Stock
Figure 1 – BAC 1W Price Chart vs Net income vs Net margin vs EPS estimates vs P/B ratio vs Total common shared outstanding. Source: Done by the author using TradingView

Analyzing a bank is different from analyzing another company. While the interest is a disbursement for an ordinary company, for a bank is its revenue. The Bank of America shows an increase in Net income along with the net margin. This means that the bank is efficiently managing its costs and expenses to deliver more cash to its shareholders.

The EPS (Earning Per Share) has more than doubled since June 2016 from $0.33 to $0.77. Note that the total common shared outstanding is decreasing which can be tied to a possible share repurchase plan from the bank.

According to their 4Q22 presentation, the Bank of America has a net interest income growing at 29% YoY and a provision for credit losses of $1B. The stocks are being traded at an 18% premium in relation to the book value (P/B = 1.18) while the financials sector median is about 30% premium (P/B = 1.30).

The P/E ratio (11x) is in line with the sector median. It doesn’t look cheap from a valuation perspective, but the ability of this financial institution to deliver increasing EPS overtime must be taken into consideration.

Stock #2: Johnson & Johnson (JNJ)

JNJ Stock

Coincidently or not, Johnson & Johnson was one of our “Blue chip stocks that pay dividends”. The analysis and conclusion remain the same, so I’ll just quote some important parts of the last article:

The company is in the Health Care Sector (Pharmaceuticals industry) and it has been delivering sustainable results over the past 5 years. The FCF margin is over 20% and the company is making some key acquisitions to grow, like the Abiomed that can result in considerable gains in the long run.”


The company looks expensive right now with metrics like Price/Cash Flow, Price/Book, and Price/Sales above the Health Care sector median. It looks like the market is willing to pay a “premium” for a company like Johson & Johnson that has been delivering amazing results so far, even through a hostile environment like the one we are going through.

Make sure to read our full article here.

Stock #3: Amazon (AMZN)

Amazon logo

Amazon (AMZN) is one of the biggest retailers in the world and also the largest cloud computing service provider. The company was highly impacted by COVID. Since November 2021, the stock price has gone down about 60%. On the other hand, while the Quarter results were impacted, the company is managing to deliver positive and increasing annual results along with margin expansion.

Figure 2 shows some metrics for AMZN:

AMZN stocks
Figure 2 – AMZN 1W Price Chart vs Total revenue vs Net income vs Net margin. Source: Done by the author using TradingView.

AMZN stock price is the same as it was in 2018 with the “minor” difference that in 2018 the total revenue, net income, and net margin were way lower than nowadays. Figure 3 shows an increasing cash flow from operating activities with a considerable retraction in 2021 due to COVID. The same happened with EPS apart from 2022.

AMZN Stock
Figure 3 – AMZN 1W Price Chart vs Cash from operating activities vs P/CF ratio vs EPS estimates. Source: Done by the author using TradingView.

Amazon doesn’t look cheap in comparison with the Consumer Discretionary or Information Technology sectors since it’s trading at 25x CF. From a valuation perspective, AMZN may look overvalued even at the current price. On the other hand, the company’s potential growth opportunities may come from its solid dominance in web services.


Considering a simple valuation perspective, all of the stocks mentioned seem overvalued in relation to their sectors. The main question is that valuation isn’t everything. When you buy a stock, you are buying its future cash flow that even with enough past data, you have no idea how much it will be.

Some stocks are traded with a premium due to their solid past financial results and potential future. Fair enough. Quality must be well recompensated. But how much will be enough? We’ll never know. Valuation is just a guess based on past numbers and possible future growth.

Another factor to consider is the price. If you are an investor who got AMZN, BAC, or JNJ very cheap, it will possibly make no sense to sell them since you will lose all of your future benefits. So, valuation is just a small component of a stock analysis that will hardly tell everything. Probably investors like Buffett will always be able to see things that the numbers can’t.


The stock analysis presented on Echo Chamber site is meant to be used for educational purposes and doesn’t represent any kind of financial advice such as buying, selling, or holding shares of any particular stock. Past performance is no guarantee of future results. Investments in variable income can result in the loss of wealth.

The objective of this analysis is to didactically present just a few metrics that can be used to analyze an asset. A full analysis must go further and consider many other financial statements like the income statement, balance sheet, and complete cash flow. 

In addition to that, knowing the company, the sector, the economy, and the administration’s guidelines about the company’s future along with basic knowledge of corporate finance are required in order to perform a full stock valuation.

It’s strongly advisable that any investor conduct their own research on any company prior to investing in it. Any suggestion from third parties should be carefully analyzed and used as input, a part of the information needed in the investment decision-making process.

The choice of using the TradingView platform it’s personal without any commercial purpose. I consider this platform one of the best available in the market. The free version offers enough resources for a good analysis, but the paid plans can also offer much more value depending on the investor’s objectives and expertise to use the information available.