We track 13F filings from hedge funds and other major investors, including Warren Buffett’s holding company Berkshire Hathaway, for a few different purposes. For one, we have found that the most popular small cap stocks among the filers we track- even with the inherent delay which comes from using 13F filings- earn an excess return of 18 percentage points per year and we continue to research other investment strategies. Of course, Buffett’s picks themselves- while it may not be wise to blindly imitate them- are of interest and we can further refine his portfolio by looking at the stocks in his filing which are in line with traditional value criteria. Here are our quick thoughts on Berkshire’s five largest holdings as of the end of December in stocks with both trailing and forward price-to-earnings multiples of 11 or lower (or see the full list of stocks it reported owning):
Buffett’s new top pick by market value is Wells Fargo & Co (NYSE:WFC) after adding shares in the fourth quarter of 2012. While Wells Fargo is a questionable value in terms of the book value of its assets (the stock’s P/B ratio is 1.3), it is able to generate enough earnings that its earnings multiples are about in line with many other large banks. The trailing P/E of 11 is certainly competitive with peers such as Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC), and earnings were up 24% last quarter compared to the fourth quarter of 2011. Billionaire Ken Fisher’s Fisher Asset Management also had a large position in Wells Fargo (check out Fisher’s stock picks).
Find three more cheap stock picks from Warren Buffett:
The holding company reported a position of over 27 million shares in Phillips 66 (NYSE:PSX). Phillips 66 is a refining, marketing, and chemicals company recently spun out from ConocoPhillips (NYSE:COP) with a current market cap of $41 billion. It trades at 10 times earnings, whether we compare that market cap to trailing earnings or to analyst consensus for 2014. While that is a cheap valuation metric, it appears that reported revenue and earnings have been down recently. Legg Mason Capital Management, managed by Bill Miller, had 1.7 million shares of Phillips 66 in its portfolio (find Miller’s favorite stocks).
ConocoPhillips itself also qualifies as a cheap Buffett stock pick with Berkshire owning 24 million shares at the end of the fourth quarter of 2012. Neither position was changed in the previous three months so Buffett appears to like both companies for the long term. ConocoPhillips, as it happens, is not only a value play at 10 times forward earnings estimates but also has been paying sizable dividends which equate to a yield of 4.6%. Two Sigma Advisors moved heavily into the stock in the fourth quarter (research more stocks Two Sigma is buying).
General Motors Company (NYSE:GM) rounds out our list of Buffett’s top five cheap stock picks; he increased his stake by 67% between October and December to a total of 25 million shares. GM was one of the most popular stocks among hedge funds in the fourth quarter of 2012 (find more stocks hedge funds loved). It’s another stock where the sell-side is very optimistic, with the five-year PEG ratio coming in at 0.5. The trailing P/E of 10 is competitive with other automakers, and so we would compare GM to its peers before deciding if it might be a good value for its industry.
Disclosure: I own no shares of any stocks mentioned in this article.
