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With 13F season heating up, and the deadline for filings on February 14th fast approaching, I thought it would be an interesting idea to try to predict a new holding(s) for Warren Buffett's Berkshire Hathaway (NYSE:BRK.B). To accomplish this I will use a simple process to screen for stocks that have traits in common with the top five holdings of Berkshire Hathaway. My logic for that process is that the top five holdings according to Whalewisdom.com make up 74.4% of the Berkshire Hathaway portfolio, so the top five holdings are the stocks Warren Buffett has a strong belief in their companies. The top five holdings of Berkshire Hathaway are: The Coca-Cola Company (NYSE:KO), Wells Fargo & Co. (NYSE:WFC), International Business Machines (NYSE:IBM), American Express (NYSE:AXP), and Procter & Gamble Co. (NYSE:PG).

Why Buffett?

The reason why I chose Warren Buffett to follow was because of his impressive investing record. According to Longrundata.com since the inception of the SPDR S&P 500 (NYSEARCA:SPY) on January 29th 1993, the SPY has a annualized total return of 8.28%. To compare I will be using the return from the class A shares because the data for class B shares starts in 1996 so there is no data on the B shares before that. Since the same date as the inception of the SPY [January 29th 1993, BRK.A has a annualized total return of 13.22%. So on average over the last 20 years Warren Buffett's stock picks have provided nearly a 5% outperformance over the S&P 500 per year. Therefore, that is the reason that I chose to look for stocks that Warren Buffett could like based on his current top five holdings which he has the strongest conviction for.

My Process

First, I had to find metrics/conditions that were present in all five holdings in the Berkshire Hathaway portfolio, so I used the Fidelity Compare Tool to accomplish this. Second, in another tab of my web browser, I opened the Fidelity Stock Screener to screen for the items in common I found with the compare tool. After entering each symbol of the top five holdings in the compare tool, I started looking for items that were included in all five, and which were available as screen criteria. Below is a list of the metrics/qualities that I found using the compare tool, that each of the top five holdings have.

  1. Security Type: Common Stock
  2. Exchange: NYSE or NASDAQ
  3. Market Capitalization: Greater than $10 Billion [10000 millions entered in screener]
  4. Dividend Yield: Greater than 1.00%
  5. P/E [Price/TTM EPS]: Less than 25
  6. EPS Growth 5 Year Historical: Greater than 0.
  7. Forward EPS Long-Term Growth [3-5 years]: Great than 5.00%
  8. EPS Growth Projected Next Year vs This Year: Greater than 0.
  9. EPS Growth Projected This Year vs Last Year: Greater than 1.00%.
  10. % Institutional Ownership: Greater than 50%
  11. Short as % of Shares outstanding: Less than 2.
  12. Days to cover: Less than 4.
  13. Standard Deviation [3 year annualized]: Less than 0.30
  14. Beta [5 year annualized]: Less than 2.00
  15. Volume [ 90 day average]: Greater than 2 Million

The Results

After entering the above items in the stock screener, I ended up with 32 stocks that met the criteria, and are listed below in the following table:

Company

Symbol

Company

Symbol

APPLE INC

AAPL

MATTEL INC.

MAT

ACCENTURE PLC

ACN

MEDTRONIC INC

MDT

AMERICAN EXPRESS CO

AXP

MCGRAW-HILL COMPANIES

MHP

BAXTER INTERNATIONAL INC

BAX

MARSH & MCLENNAN

MMC

CARDINAL HEALTH INC

CAH

3M CO

MMM

COMCAST CORP

CMCSA

MICROSOFT CORP

MSFT

COSTCO WHOLESALE CORP

COST

NIKE INC

NKE

COVIDIEN PLC

COV

PROCTER & GAMBLE CO

PG

CSX CORP

CSX

QUALCOMM INC.

QCOM

CVS CAREMARK CORP

CVS

TARGET CORP

TGT

EMERSON ELECTRIC CO.

EMR

TJX COMPANIES INC

TJX

FIDELITY NATIONAL INFORMATION SERVICES

FIS

UNITEDHEALTH GROUP INC

UNH

GENERAL MILLS INC.

GIS

U.S. BANCORP

USB

INTERNATIONAL BUSINESS MACHINES

IBM

VIACOM INC

VIAB

ILLINOIS TOOL WORKS INC.

ITW

WELLS FARGO & CO

WFC

COCA-COLA CO

KO

YUM! BRANDS INC.

YUM

Then to get my semi-final list of stocks I had to take out the top five holdings, so I excluded KO,WFC,IBM,AXP, and KO from my final list. Then I also had to see if Berkshire Hathaway already owned any of the remaining 27 stocks, so I went back to the Whalewisdom.com holdings page and found that an additional three stocks were already included in the Berkshire Hathaway portfolio, they were Costco (NASDAQ:COST), US Bancorp (NYSE:USB), and Viacom (NASDAQ:VIAB). I also excluded CVS Caremark (NYSE:CVS) because Berkshire exited that position last quarter. I had 23 stocks remaining on my list, so I decided that because Warren Buffett only buys companies he calculates to be undervalued and excludes those that are calculated to be overvalued, therefore I decided to use a discounted cash flow tool on Smartmoney.com, to see which of the 23 stocks were undervalued. The data I will use on the calculator for each stock is the TTM EPS, and long-term earnings growth rate is from Zacks.com, for the year's field on the calculator I will use 3 years, in the perpetual growth field I will use 1% and I will use a benchmark return of 10%. The following table shows the results of using the calculator for each stock.

Company

Symbol

TTM EPS

LT EPS Growth

Current Price

Fair Value

% Undervalued

APPLE INC

AAPL

44.16

21.54%

500.00

830.8

-39.81%

UNITEDHEALTH GROUP INC

UNH

5.28

11.43%

54.56

77.85

-29.92%

MICROSOFT CORP

MSFT

2.64

9.92%

27.25

37.47

-27.28%

CSX CORP

CSX

1.79

12.75%

20.91

27.28

-23.35%

TARGET CORP

TGT

4.49

11.79%

61.53

66.8

-7.89%

CARDINAL HEALTH INC

CAH

3.29

10.50%

44.64

47.39

-5.80%

MEDTRONIC INC

MDT

3.56

7.43%

45.67

47.4

-3.65%

FIDELITY NATIONAL INFORMATION SERVICES

FIS

2.46

11.50%

37.06

36.33

2.01%

MCGRAW-HILL COMPANIES

MHP

3.32

14.80%

54.34

53.21

2.12%

COVIDIEN PLC

COV

4.27

9.35%

61.00

59.73

2.13%

3M CO

MMM

6.25

10.60%

98.74

90.25

9.41%

BAXTER INTERNATIONAL INC

BAX

4.44

8.69%

67.05

61.07

9.79%

MATTEL INC.

MAT

2.45

9.40%

38.03

34.32

10.81%

MARSH & MCLENNAN COMPANIES

MMC

2.07

11.75%

34.94

30.77

13.55%

EMERSON ELECTRIC CO.

EMR

3.39

10.37%

55.89

48.67

14.83%

GENERAL MILLS INC.

GIS

2.67

7.52%

41.37

35.64

16.08%

ILLINOIS TOOL WORKS INC.

ITW

4.07

7.91%

63.72

54.87

16.13%

ACCENTURE PLC

ACN

3.94

10.88%

70.11

57.3

22.36%

QUALCOMM INC.

QCOM

3.24

15.42%

64.68

52.71

22.71%

TJX COMPANIES INC

TJX

2.35

11.86%

44.75

35.02

27.78%

YUM! BRANDS INC.

YUM

3.17

11.38%

65.15

46.68

39.57%

COMCAST CORP

CMCSA

1.88

12.77%

40.26

28.66

40.47%

NIKE INC

NKE

2.39

12.04%

53.29

35.78

48.94%

Closing thoughts

Based on the discounted cash flow results, seven companies are currently undervalued, and those are the companies I think have the best chance to be included on the next 13F filing for Berkshire Hathaway. Below are the seven companies on my final list with a short business description for each. I am anxious and interested to see if any of the seven will be a new holding.

Apple (NASDAQ:AAPL) - "Apple Inc., together with subsidiaries, designs, manufactures, and markets mobile communication and media devices, personal computing products, and portable digital music players worldwide. Its products and services include iPhone, a handheld product that combines a mobile phone, an iPod, and an Internet communications device; iPad, a multi-purpose mobile device; desktop computers, such as iMac, Mac Pro, and Mac mini; portable computers, including MacBook Pro and MacBook Air; a line of iPod portable digital music and media players; and iCloud, a cloud service." [Yahoo Finance]

UnitedHealth Group (NYSE:UNH) - "UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The companys UnitedHealthcare segment offers consumer-oriented health benefit plans and services to national employers, public sector employers, mid-sized employers, small businesses, and individuals." [Yahoo Finance]

Microsoft (NASDAQ:MSFT) - "Microsoft Corporation develops, licenses, and supports software products and services; and designs and sells hardware worldwide. The companys Windows & Windows Live division offers PC operating system that primarily includes Windows 7 operating system, Windows live suite of applications and Web services, and PC hardware products." [Yahoo Finance]

CSX Corp (NYSE:CSX) - "CSX Corporation, together with its subsidiaries, provides rail-based transportation services. It offers traditional rail service and the transport of intermodal containers and trailers." [Yahoo Finance]

Target (NYSE:TGT) - "Target Corporation operates general merchandise stores in the United States. The company offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; hardlines comprising music, movies, books, computer software, sporting goods, and toys, as well as electronics that comprise video game hardware and software; apparel and accessories consisting of apparel for women, men, boys, girls, toddlers, infants, and newborns; and intimate apparel, jewelry, accessories, and shoes." [Yahoo Finance]

Cardinal Health (NYSE:CAH) - "Cardinal Health, Inc., a healthcare services company, provides pharmaceutical and medical products and services in the United States and internationally. The company operates in two segments, Pharmaceutical and Medical." [Yahoo Finance]

Medtronic (NYSE:MDT) - "Medtronic, Inc. manufactures and sells device-based medical therapies worldwide. It provides products to diagnose, treat, and manage heart rhythm disorders and heart failure, including implantable cardiac pacemakers, implantable cardioverter defibrillators, cardiac resynchronization therapy devices, arctic front cardiac cryoablation catheters, arctic front cardiac cryoablation catheters, and patient management tools." [Yahoo Finance]

Disclaimer

Source: Predicting Warren Buffett's Next New Holding