MarketWatch ran a story this weekend profiling the six biggest positions Warren Buffett's Berkshire Hathaway added in 2012. They consisted of Wells Fargo (WFC), General Motors (GM), DirectTV (DTV), Davita Healthcare Partners (DVA), National Oilwell Varco (NOV) and IBM Corp (IBM). DirectTV and Davita were actually picks of Buffett's lieutenants not the Oracle of Omaha, so let's dismiss them from analysis for this piece.
GM looks good from a valuation perspective at about 6.5x 2014's projected earnings and is priced at just 25% of revenue. However, I have trepidation in recommending an investment in an equity that still has so much government involvement and where the UAW plays such a large role as well. I also think its problems and losses in Europe are going to be with it for years if not the rest of the decade. Finally, I think Ford (F) is the better pick in the sector and I am already long that auto stock which I recently profiled.
IBM has done a terrific job over the last five years migrating from a hardware vendor to a sales & services provider. However, revenues have been basically flat for five years and the company now is up to 80% of its revenues coming from outside hardware which makes further margin improvement more challenging. The stock is also selling at the top of its five year valuation range based on P/S, P/CF and P/B. At almost 15x forward earnings and yielding under 2%, I see no compelling reason to own the shares at these levels. The two other major investments in Buffett's portfolio look attractive here.
I have been positive on Wells Fargo since July as I outlined in this article. I wrote at the time that the bank was in a better long term position than its brethren (Citigroup (C), Bank of America (BAC) and JP Morgan (JPM)). This was recently confirmed when Wells outperformed its peers in the recently completed stress tests. The stock is up 10% since that piece ran not including dividends. The bank has further upside from here. It stands as the biggest private mortgage originator in the country and is a major beneficiary of the continuing housing market recovery. The stock is at a four year high but sells at just 10x this year's expected earnings. It also yields 2.7% and after the successfully completed stress tests, I would look for payouts to increase considerably over the next couple of years.
National Oilwell Varco is a large oil services firm which has a bright future ahead of it. Its order backlog stood at $11.9B at the end of 2012 significantly above 2011's year end backlog of $10.2B. The 25 analysts that cover NOV have a median price target of $85 a share on the stock, about 25% above its current price of $68. S&P has its highest rating "Strong Buy" and a $95 price target on the shares. Analysts also expect the company to expand revenues at better than a 10% CAGR over the next two years and the stock sports a five year projected PEG of under 1 (.82). The company has an A rated balance sheet and sells at just 10x projected 2014's earnings. Finally, the stock is selling in the bottom third of its valuation range based on P/E, P/S, P/B and P/CF.