Wal-Mart Stores, Inc. (WMT), International Business Machines Corp. (IBM): What Warren Buffett Is Buying and What I am Buying

As many already know, Warren Buffett has a portfolio that is widely watched and imitated by expert and novice investors alike.  After all, he is worth an estimated $46 billion according toForbes, making him one of the most successful investors ever. But is his value investing strategy still relevant?  Or are there better strategies?  What stocks does he currently own, and how are they likely to perform over the next few years?

Let’s take a closer look at some of the companies that he has large stakes in and determine whether or not you should invest in these companies or invest elsewhere.

A dominant retailer

With yearly sales of more than $450 billion, Wal-Mart Stores, Inc. (NYSE:WMT) is the world’s largest retailer.  As the world’s largest retailer, Wal-Mart has all of those things that investors like Warren Buffett love: scale, negotiating power with suppliers, a very cost-efficient supply chain, and data dominance.  That means that Wal-Mart is usually able to sell products less than the majority of its competitors.  Warren and I both love the fact that Wal-Mart has a business that is easy to understand and that it has a significant competitive advantage over its peers: the ability to provide either the same or a comparable product at a lower cost.  Although comparable sales are not looking so hot, there is no reason to believe that Wal-Mart will not continue to grow its top and bottom lines at a healthy and predictable 4-7%.  That is why mostanalysts have a 12-month Hold rating on Wal-Mart, and a 5-year (or long-term outlook) rating of Buy.  Overall, Wal-Mart is fairly valued, and it is a company that you could feel comfortable buying and holding.  But it is … well … a boring stock to own.

A tech company that once sold PCs

Another stock that Warren Buffett likes is International Business Machines Corp. (NYSE:IBM) — a company that has managed to grow its earnings per share every year over the past 10 years.  On the positive side,  Big Blue has a fairly stable business, a reasonable valuation, and its services and software margins are expanding.  On the negative side, IBM continues to miss both top and bottom-line expectations; IBM needs to ramp up its niche M&A activity. With the “death of the PC” looming, it seems that every company is trying to reinvent itself like IBM did.  That said, it will be interesting to see how IBM, Dell Inc. (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ), Apple Inc. (NASDAQ:AAPL), Lenovo, SanDisk Corporation (NASDAQ:SNDK), and others perform over the next few years.  Overall, IBM is “too big to really grow” and with all of the strategic alliances in the IT space, IBM does not appear to be well-positioned to maintain its market share.  In fact, it will need niche M&A activity to catalyze any sort of growth.  I am writing it off as “old tech.”

A bank too big too fail

Then there is Wells Fargo & Co (NYSE:WFC).  Admittedly, I believe that every investor should own at least one bank stock.  Wells Fargo is worth considering.  The company nearly doubled its assets when it acquired Wachovia, and approximately one in every four residential mortgages are originated through Wells.  Wells Fargo trades at an earnings multiple of around 11, has a dividend yield of slightly more than 3%, and is arguably the best managed of the big banks. Still, more than 5% of Wells Fargo’s mortgages are either delinquent or in foreclosure.  Plus, competition with Bank of America Corp (NYSE:BAC) and other banks is impacting its lending margins.  All factors considered, I feel that many of the US banks have experienced significant price appreciation over the past few months and that estimates are overly optimistic.  That is why I recommend considering either smaller banks in the United States or banks outside of the United States that have higher dividend yields and more room for price appreciation.

3 factors to consider

1. Risk and return:  Warren Buffett tends to invest in blue-chip favorites.  Those companies tend to grow earnings at a predictable and healthy 5-7%.  They are low-to-moderate risk companies that offer modest returns.
2. Investor’s willingness to pay:  At the end of the day a stock price is determined by the last price that somebody paid.  Warren Buffett tends to avoid companies that are difficult to value according to standard valuation metrics such as internet companies.
3. Growth potential:  Many of the companies which Warren Buffett likes have sound business models and iconic brands, but limited potential for growth.

My Foolish take

Of the companies mentioned above, none of them are showing up on my radar.  Although I feel that investors who have a low risk tolerance should consider these stocks rather than bonds or treasury bills given the low interest rate environment, I would prefer to invest overseas given that the U.S. market is very pricey.  Right now the companies that I highlighted in Bargain Hunting In Brazil look especially enticing, particularly given that there was a plethora of bad news about Brazil over the past few weeks that sent many Brazilian companies down well below fair value.