Warren Buffett Portfolio: How He’s Playing The Small-Caps

A note to all Warren Buffett portfolio watchers: In the financial blogosphere, investors are constantly inundated with offers for hundreds of off-Wall Street stock pick lists, tricky option strategies or news services that ‘guarantee’ to give you market-moving information before anyone else. A large percentage of the time, this stuff is junk, and in many cases, cited return statistics focus on one specific stock recommendation that was a home run, rather than the entire picture (which may be underwhelming).

Every now and then, however, there are diamonds in the rough, and one such opportunity currently exists in a specific subset of the hedge fund industry. At Insider Monkey, our empirical research has discovered that it is possible to beat the broader indices by mimicking the top small-cap picks of the most elite 500+ hedge funds in existence. By focusing on the best stock picks of the best money managers, we’re simply letting their top-dollar research do the work for us.

Between 1999 and 2009, hedge funds’ favorite small-cap picks beat the market by 18 percentage points per year. Since sharing this strategy with our subscribers in August of last year, the results have been even better: one-year returns totaled 47.6%, beating the S&P 500 index by more than 29 percentage points.

With these aggregate findings in mind, it also stands to reason that it’s worth it for readers to look at the favorite small-cap picks of specific fund managers. Warren Buffett is easily the most well known of the bunch, so we’re going to run through his top small-caps.

As is the case with many value investors, Buffett favors concentration. In any given quarter, he and his management team at Berkshire Hathaway Inc. (NYSE:BRK.B) hold between 30 and 45 positions in their equity portfolio, which totaled $89 billion last quarter. Of the 42 companies Buffett held shares of at the end of Q2, the following four picks had market capitalizations between $1 billion and $5 billion, and were his only investments in the small-cap space.

The Washington Post Company (NYSE:WPO) is No. 1 on this list and is Buffett’s 14^th largest holding overall. The position represents a little over $991.8 million worth of stock in the media and educational company, controlling nearly a quarter of WashPo’s overall market cap. Buffett and Berkshire have been invested here since 1973, and although shares have underperformed the S&P 500 in the years since, dividends have served the holding company well. Berkshire currently receives a 1.7% dividend yield on its WashPo shares, and capital gains this year have been phenomenal; its year-to-date return clocks in at 55.1%.

With last month’s sale of The Washington Post, Express, The Gazette and a few other assets to Amazon.com, Inc. (NASDAQ:AMZN) CEO Jeff Bezos, The Washington Post now finds itself in a leaner position moving forward. Post-sale, the company will maintain control over Slate, TheRoot.com, Foreign Policy and its Kaplan division in addition to a few others, so we’ll be interested to see how Buffett handles this change.

USG Corporation (NYSE:USG) and WABCO Holdings Inc. (NYSE:WBC), meanwhile, are the second and third largest small-cap positions in Buffett’s equity portfolio, both sitting inside the top 30 overall. Each company represents a relatively attractive growth opportunity. USG operates in the building materials segment of the housing market, and a continued recovery in real estate has sell-side analysts expecting fireworks next year. Wall Street forecasts 175% EPS growth for USG next year on the back of secular tailwinds, which should allow the company to pay down some of its mountain of debt.

Wabco, on the other hand, is Buffett’s only small-cap in the auto market, and steady growth at a reasonable price makes the auto parts provider a nice compliment to his larger stakes in General Motors Company (NYSE:GM) and Precision Castparts Corp. (NYSE:PCP). Wabco presently trades at a PEG ratio of 0.94, and earnings are expected to grow by 20% a year over the next half-decade.

Starz (NASDAQ:STRZA), lastly, is Warren Buffett’s final small-cap holding, sitting just outside of the top 30 overall. Since its split from Liberty Media Corp (NASDAQ:LMCA) early this year, shares of the premium media provider are up 88.7% in a little over eight months. Still trucking along at a price-to-sales multiple near 2.0x, Starz operates in an expanding macro environment with promising subscriber numbers. There’s always the possibility of a buyout given its commanding margins and fairly attractive trading price.

Check out the full Warren Buffett portfolio in the equity universe by following that link.

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