By: Jake Mann
Hundreds of prominent hedge fund managers file their quarterly 13F holdings with the SEC, though some are inherently better for retail investors to track. Our research has shown that historically, it has been possible to beat the market by mimicking the best picks of the best money managers (see full details here).
Warren Buffett and his investment vehicle, Berkshire Hathaway, sit at the top of the smart money's elite, so we're going to take a look at what their five largest stock holdings were at the end of the fourth quarter. This so-called "fab five" has shuffled ever so slightly since Buffett's third-quarter holdings were released. Let's get started.
Wells Fargo (NYSE:WFC) displaced Coca-Cola (NYSE:KO) from Buffett's No. 1 spot last quarter, as the Oracle of Omaha bought a little over 17 million shares of the banking giant during the three-month period. Since we began tracking Berkshire in Q4 of 2010, Coca-Cola had sat at the top of its equity portfolio for at least eight consecutive quarters, so this move isn't simply something to shrug off.
We've already discussed how Buffett's tendency to use Wells Fargo as a key financier in Berkshire's acquisitions is a long-term positive, and its dividend yield above 2.8% is better than all of its industry peers. Wall Street's average price target on this stock represents an 11-12% upside from current levels, and shares aren't particularly expensive at 9 times forward earnings. Buffett likely loves Wells for its appeal to value and income-seekers alike, and retail investors should too.
Coca-Cola, meanwhile, now accounts for 19.2% of Berkshire's equity portfolio after cracking the 20% mark at the end of the third quarter. While Buffett didn't cut his position in the beverage behemoth in Q4 (he has never sold a share of KO), it was the only stock in his top three that he wasn't buying more of, which is a point worth making. In this three-month period, shares of Coca-Cola did lose 4.4%, but have regained much of this back since the start of 2013.
After growing its bottom line by nearly 9% a year over the past half-decade, the sell-side's earnings forecast hasn't changed, but Coca-Cola does currently trade at a PEG north of 2.0. Obviously, this doesn't send a clear-cut "overvaluation" signal to Mr. Market, but it does indicate that investors are placing a premium on Coca-Cola's growth prospects. According to data from YCharts, this stock's year-end PEG ratio was about 10% higher than it was at the end of 2011, though analysts' average price target still represents an upside above $42 per share.
International Business Machines (NYSE:IBM) saw Buffett buy close to 600,000 more shares by the end of last year, and the tech giant has had a decent 2013, returning nearly 5% already. It remains to be seen just how long IBM can stay above the $200 mark-generally regarded as an important psychological level-but at fairly valued metrics across the board, there isn't anything glaring about its current trading price. Buffett first initiated his position in IBM in the third quarter of 2011, and with six consecutive EPS beats under its belt, shares have stayed in the green since this point. Other notable fund managers bullish on IBM include Ken Fisher, D.E. Shaw and Tom Gayner.
American Express (NYSE:AXP) and Procter & Gamble (NYSE:PG) round out Buffett's "fab five," and have done so since the third quarter of 2011. Generally speaking, American Express operates in a friendlier economic environment than Procter & Gamble, though the latter company pays a dividend yield of close to 3%-fifth highest in the personal products industry.
AXP shares do offer a decent dividend yielding 1.3%, though the primary attractive feature of this stock is its valuation. American Express trades at a mere 11.6 times forward earnings, despite the fact that the Street expects EPS growth to average more than 10% annually over the next five years. This forecast is a far cry from the low-single-digit growth that the credit services company has experienced over the past half-decade, so it appears that investors may be underappreciating these prospects.
Each member of Warren Buffett's top five holdings is supported by a solid investment thesis moving forward, and as a whole, this basket of stocks appeals to investors of all philosophies. With the long-term track record that Buffett has produced, it's difficult to argue against any of these picks, and our research shows that retail investors should always pay attention to the smart money.