For nearly six decades, Berkshire Hathaway CEO Warren Buffett has been dazzling Wall Street with his investing prowess. Through the closing bell on Nov. 17, the Oracle of Omaha has overseen a nearly 4,400,000% aggregate return in his company’s Class A shares (BRK.A).

Buffett’s success is often attributed to his long-term ethos and love of time-tested, brand-name businesses. But not nearly enough credit is given to his penchant for portfolio concentration. Though Berkshire Hathaway holds stakes in more than four dozen securities, Buffett strongly believes that his and his investment teams’ best ideas should receive added weighting.

Let’s make one thing very clear: I’m no Warren Buffett. I don’t have his bankroll or roughly eight decades of experience as an investor.

What I do have is a portfolio of 46 stocks that’s modeled similarly to the Oracle of Omaha’s portfolio. Approximately one dozen of the stakes I hold account for a significant percentage of my invested assets.

While I’ve been generally content with the size of many of my larger-weighted positions, there are three core holdings I simply can’t stop buying in 2023.

Walgreens Boots Alliance
I’m a big fan of time-tested, beaten-down companies that have the tools and intangibles necessary to effect successful turnarounds. That’s why I’ve been aggressively buying shares of pharmacy chain Walgreens Boots Alliance (WBA) over the past three-plus months.

There are viable reasons Walgreens has struggled mightily over the past five years, including Amazon entering the online pharmacy space and the COVID-19 pandemic disrupting foot traffic into Walgreens’ physical stores. While not ignoring these headwinds, it’s important to recognize the multipoint steps the company is taking to address its future growth prospects.

As you might imagine, cost-cutting is part of the process. Walgreens shed more than $2 billion in annual operating expenses by the end of fiscal 2021 (ended Aug. 31, 2021), and it’s on track to cut yearly operating costs by an aggregate of $4.1 billion. While this’ll be a positive for the company’s operating margin, I’m far more intrigued by the actions management has taken on the growth front.

For instance, Walgreens has been aggressively spending on various digitization initiatives designed to streamline its supply chain and promote its relatively nascent direct-to-consumer segment. Although Walgreens relies heavily on sales from its brick-and-mortar locations, the pandemic was a wake-up call of how important it is for the company to make online purchasing more prominent and convenient.

Equally important is Walgreens (finally) making the vertical leap into healthcare services. After years of horizontal expansion, Walgreens became a majority investor in health clinic operator VillageMD. The two have opened more than 200 full-service clinics colocated in Walgreens’ stores, with a goal to reach 1,000 operating locations by 2027 in 30 major U.S. markets. While most in-store clinics are limited to vaccines or treating the sniffles, VillageMD’s clinics are physician-staffed and ripe for repeat customers with an assortment of ailments.

There’s also an incredible value proposition with Walgreens — especially with its new CEO, Tim Wentworth, having a background in healthcare. A forward-year price-to-earnings (P/E) ratio of less than 6 simply doesn’t do justice to the profit and income potential Walgreens Boots Alliance brings to the table.

Lovesac
A second existing holding I can’t stop adding to my portfolio in 2023 is furniture retailer Lovesac (LOVE).

Just the thought of putting money to work in the furniture industry is probably enough to bore some people to sleep. That’s because most furniture retailers are slow-growing and heavily reliant on foot traffic into their brick-and-mortar locations. To boot, differentiation is hard to come by, with most retailers leaning on the same small group of furniture wholesalers.

The reason I can’t stop buying Lovesac is very simple: It’s unique.

The difference between Lovesac and its peers begins with the company’s furniture. Approximately 90% of its net sales derive from sactionals, modular couches that can be arranged dozens of ways to fit most living spaces. Sactionals come with over 200 different cover choices, can be upgraded to include surround-sound and wireless charging stations, and the yarn used in their production is made from recycled plastic water bottles. It’s eco-friendly furniture with optionality, functionality, and uniqueness that simply can’t be matched.

Something else working in Lovesac’s favor is the type of customer it’s targeting with its products. Since the company’s sactionals are pricier than traditional sectional couches, it’s primarily targeting a higher-earning customer. Consumers with higher incomes are less likely to alter their purchasing habits during periods of above-average inflation and/or weaker economic growth. In other words, it’s a formula for consistent operating cash flow in any economic climate.

Another reason Lovesac checks all the right boxes for me is its omnichannel sales platform. Whereas most furniture retailers are entirely reliant on their brick-and-mortar locations, Lovesac successfully shifted a significant percentage of its sales online during the pandemic. It also operates pop-up showrooms and has partnerships in place with a handful of brand-name retailers. The key point is that Lovesac’s overhead expenses are lower than its brick-and-mortar-based peers, which has led to superior margins.

The valuation makes a lot of sense too. Lovesac can sustain a double-digit growth rate, yet can be scooped up for about 8 times forward-year earnings. It might just be my favorite small-cap stock at the moment.

PayPal Holdings
The third stock I can’t stop buying in 2023 is fintech industry leader PayPal Holdings (PYPL).

There are a couple of well-defined headwinds affecting PayPal, the most prominent being that increased competition in the digital payments space has weighed on its gross margin over the past year.

Likewise, fears of an economic downturn and above-average inflation have threatened to reduce the discretionary spending power of lower-earning workers. Since PayPal is primarily a fee-driven payment platform, fewer transactions would likely lead to lower gross profit.

Despite these concerns, PayPal’s key performance metrics have remained rock solid amid the backdrop of an uncertain economic outlook. Though its gross margin has tapered a bit, total payment volume (TPV) traversing its networks has consistently grown by a low-double-digit percentage, sans currency movements.

Even more important than PayPal’s TPV growth is the fact that active users are more engaged with its platforms (predominantly PayPal and Venmo) than ever before. When 2020 came to a close, the average active account had completed 40.9 transactions over the trailing-12-month (TTM) period. As of Sept. 30, 2023, PayPal’s active accounts have averaged 56.6 transactions over the TTM. More transactions should lead to higher gross profit for PayPal.

Another important stepping stone for PayPal’s future is its recent hire of Alex Chriss as CEO. Chriss came over from Intuit, where he was an executive vice president and general manager of Intuit’s Small Business and Self-Employed Group. In addition to fully understanding the opportunity PayPal has with burgeoning small- and midsized businesses, Chriss will oversee cost-cutting initiatives designed to boost the company’s operating margin.

Lastly, PayPal is historically cheap. In spite of its history of double-digit sales growth, PayPal can be purchased right now for roughly 10 times forward-year earnings. It’s an absolute steal, considering the more than $5 billion the company has returned to shareholders via buybacks over the TTM (ended Sept. 30).

— Sean Williams

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Source: The Motley Fool