Warren Buffett bought this 1 stock to start 2022, should you buy it before the end of the year?

When you have a 60-year history of churning out compound returns of 20% a year, people will tend to pay attention when buying or selling stocks. Warren Buffett is credited with being the greatest investor of all time for doing so Berkshire Hataway (BRK.A 0.07%) (BRK.B 0.10%)and clearly surpassing the S&P 500 two to one for several decades.

Investors often look to the Oracle of Omaha portfolio for investment ideas. Earlier this year, he established a position in a tech stock that, while it didn’t match his hefty bets on the oil giant Western oil made around the same time, it is likely to become a key long-term holding for him. He is one you may be interested in purchasing even now.

Warren Buffet.

Image source: The Motley Fool.

Take the slow train to growth

The personal computer market isn’t exactly the same as it was a decade or more ago, but hp (hpq -0.74%) it is the largest manufacturer based in the United States and the second largest in the world after the Chinese PC maker Lenovo, with an 18.7% share of the global market.

That market is struggling now, however, suffering its fourth consecutive drop in shipments in the third quarter and the largest drop in industry history. Market analysts at Gartner say worldwide PC shipments plunged 19.5% from the same period a year ago to 68 million units. In fact, HP had the steepest decline with a 27.5% decline, followed by Acer with a 25.6% decline and Dell at 21.1%.

HP has responded to this market weakness by announcing it will lay off up to 6,000 workers by the end of fiscal 2025, with CEO Enrique Lores saying The Wall Street Journal don’t expect improvements any time soon.

“We think it is prudent at this point not to assume that the market will change during 2023,” he said.

A difficult year and a depressed stock

When Buffett bought HP stock in April, he knew the PC maker was already experiencing weakness, as first-quarter shipments fell nearly 20% and PC sales fell 6%. However, that was more indicative of HP having strong sales in the pandemic era. Its commercial PC business remained strong, with revenue up 26% year over year.

It was a different story, however, last quarter: Consumer PC revenue was down 25% and commercial revenue was down 6%. Also, both notebooks and desktops, a source of strength previously, were down this time around.

Shares that traded at around $40 when Buffett bought now go for around $30. So it’s clear that Buffett understood that an HP investment wasn’t going to be a high-growth story going forward. So why should he buy it and why should you even consider buying it now?

Person working with a laptop.

Image source: Getty Images.

A firm hand on the rudder

HP is likely to represent a long and steady investment that will incrementally grow revenue over time while bolstering its operations with acquisitions, such as the purchase of Poly completed in August that brought the video and audio conferencing toolsmaker to remote workers and hybrids in the fold.

The $3.3 billion deal is expected to strengthen HP’s operations by creating new opportunities in today’s hybrid business situations. Poly included software, video conferencing, cameras, voice, and peripherals like headsets, which could be a particular area for future growth.

A report by Frost and Sullivan suggests that peripherals are a $110 billion industry growing 9% annually, while workplace solutions are a $120 billion segment growing 8% annually. The actual numbers are less important than the direction they’re going in and represent an opportunity for HP.

Follow the money

What undoubtedly attracted Buffett the most was HP’s ability to generate substantial amounts of free cash flow—money left over after paying bills that he can use to invest in the business.

HP generated $5.8 billion in FCF in 2021, and despite declining PC sales so far this year, it produced more than $4.8 billion in the past 12 months.

The computer and printer maker uses its cash-building capabilities to support its dividend payments and has increased its payout annually for the past 14 years. It recently raised its dividend two weeks ago when it raised its quarterly dividend by about 5% to $0.2625 per share. Berkshire Hathaway owns about 121 million HP shares, which translates to an extra $127 million in annual income for Buffett.

With solid profit margins across the board, HP looks like Buffett’s favorite blue-collar stock. Not only can you buy the stock for less than what Buffett paid, but it’s a stock that could pay dividends for your portfolio for years to come.

Rich Duprey holds no positions in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway and Hp. The Motley Fool recommends the following options: $200 January 2023 long calls on Berkshire Hathaway, $200 January 2023 short calls on Berkshire Hathaway, and $265 January 2023 short calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.

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