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Since the U.S. government shut down last week, it is estimated that there are as many as 800,000 federal workers furloughed without pay. It is inevitable that there will be some impact on the economy, but whether such impact will be prolonged and will affect the financial markets negatively is yet to be determined. So far, the Dow Jones industrial average has dropped by 2.16% from 15,129.67 on September 30, 2013 to October 9, 2013.


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In such environment it is prudent to be selective in deciding which stocks to own. To such effect, Warren Buffett is known for his positive track record in stock selection. International Business Machines Corporation (NYSE:IBM) is Warren Buffett's third largest holding, comprising about 12.2% ($12.2 billion) of his $86.7 billion Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) portfolio as of June 30, 2013. His other top five holdings include Wells Fargo & Company (NYSE:WFC) at 21.53% ($18.6 billion), The Coca-Cola Company (NYSE:KO) at 17.25% ($14.9 billion), American Express Company (NYSE:AXP) at 12.62% ($10.9 billion), and the Proctor & Gamble Company (NYSE:PG) at 4.63% ($4 billion).

IBM is well positioned to do well despite the uncertainty caused by the current government shutdown. Since 1976 there have been 18 U. S. government shutdowns. We examined the performance of IBM stock during past U.S. government shutdowns, and one year following the shutdown. Although IBM shares dropped by an average of about 0.6% during the past 17 shutdowns, IBM stock performed quite well during the following 12 months, appreciating by an average of about 18.66% from the day before shutdown to one year thereafter.

When we excluded 5 shutdowns (October 1977, November 1977, December 1982, October 1984, December 1995) that occurred within less than a month of a previously accounted for shutdown, IBM had appreciated by an average of 20.52% during the remainder 12 shutdowns. Meanwhile, the Dow Jones Industrial average had averaged an appreciation of 12.4% for the one year period following the past 17 government shutdowns.

U.S. government shutdown effect on IBM stock

Year Starting date (exclusive) Ending date (exclusive) Stock Price Change During Shutdown Stock Price Change 1-year after shutdown
1976 30-Sep 11-Oct -1.18% -3.84%
1977 30-Sep 13-Oct -1.38% 10.60%
1977 31-Oct 9-Nov -0.78% 7.01%
1977 30-Nov 9-Dec 0.15% 6.62%
1978 30-Sep 18-Oct 1.11% 2.50%
1979 30-Sep 12-Oct -2.98% 0.00%
1981 20-Nov 23-Nov -0.16% 73.48%
1982 30-Sep 2-Oct 1.48% 79.05%
1982 17-Dec 21-Dec 2.55% 33.77%
1983 10-Nov 14-Nov 1.78% 1.84%
1984 30-Sep 3-Oct -2.39% 3.15%
1984 3-Oct 5-Oct 0.00% 6.10%
1986 16-Oct 18-Oct -0.73% 14.86%
1987 18-Dec 20-Dec 0.89% 7.41%
1990 5-Oct 9-Oct -2.64% -5.11%
1995 13-Nov 19-Nov -4.47% 39.95%
1995/1996 15-Dec 6-Jan -1.25% 71.37%
2013 30-Sep NA -2.08%

Source - dates: Wikipedia ; values derived from data on Yahoo Finance

IBM stock is currently down 4.02% year-to-date from $188.91 (split and dividend adjusted) on December 31, 2012 to $181.32 on October 9, 2013. Its current market capitalization is $198.62 billion with a dividend yield of about 2.1%. Average analysts' earnings estimates are at $16.89 for the year ending December 2013 and $18.27 for the year ending December 2014, yielding price/earning ratios of 10.73 and 9.92 respectively.

Meanwhile IBM currently has a price/sales ratio of 2 vs. industry average of 5.5, and a price/book ratio of 11.2 vs. an industry average of about 15.6. For its earnings reported for the second quarter in 2013, IBM showed solid gains in its software, middleware and mainframe revenues, while its performance was dragged down by power servers and storage. Meanwhile, its service business was somewhat stable.

Given IBM 's reasonable stock price ratios for price/earnings, price/sales and price/book, in addition to its favorable historical performance following government shutdowns, and positive prospects for future growth driven by cloud computing (up 70% in first half of 2013), it is very likely that Warren Buffett's investment in IBM will pay off despite the current government shutdown. With IBM shares currently down about 4% year-to-date, these levels may provide a good opportunity for buying IBM.

Government shutdown effect on other top 5 Buffett holdings

Warren Buffett's four other top holdings also performed quite well within one year following past government shutdowns:

American Express Company

American Express shares dropped by an average of about 0.29% during the past 17 shutdowns but performed quite well during the following 12 months, appreciating by an average of about 15.14% from the day before shutdown to one year thereafter.

When we excluded 5 shutdowns (October 1977, November 1977, December 1982, October 1984, December 1995) that occurred within less than a month of a previously accounted for shutdown, American Express shares had appreciated by an average of 18.18% during the remainder 12 shutdowns. Although such numbers are less than IBM, American Express still outperformed the Dow Jones industrial average appreciation of 12.4% for the one year period following the past 17 government shutdowns.

U.S. government shutdown effect on American Express stock

Year Starting date (exclusive Ending date (exclusive) Stock Price Change During Shutdown Stock Price Change 1-year after shutdown
1976 30-Sep 11-Oct 4.26% 4.26%
1977 30-Sep 13-Oct -4.08% -5.10%
1977 31-Oct 9-Nov 4.21% -12.63%
1977 30-Nov 9-Dec -2.94% -16.67%
1978 30-Sep 18-Oct -2.15% 3.23%
1979 30-Sep 12-Oct -8.33% 14.58%
1981 20-Nov 23-Nov 0.68% 50.34%
1982 30-Sep 2-Oct 1.27% 57.59%
1982 17-Dec 21-Dec 5.39% 2.94%
1983 10-Nov 14-Nov 4.44% 13.78%
1984 30-Sep 3-Oct -5.76% 25.10%
1984 3-Oct 5-Oct 1.75% 34.06%
1986 16-Oct 18-Oct -2.50% 7.27%
1987 18-Dec 20-Dec 1.91% 18.58%
1990 5-Oct 9-Oct -2.27% 9.09%
1995 13-Nov 19-Nov 0.00% 19.46%
1995/1996 15-Dec 6-Jan -0.73% 31.46%
2013 30-Sep NA -4.08%

Source - dates: Wikipedia ; values derived from data on Yahoo Finance

The Proctor & Gamble Company

Proctor & Gamble shares dropped by an average of about 0.46% during the past 17 shutdowns but performed quite well during the following 12 months, appreciating by an average of about 8.96% from the day before shutdown to one year thereafter.

When we excluded 5 shutdowns that occurred within less than a month of a previously accounted for shutdown, Proctor & Gamble shares had appreciated by an average of 9.56% during the remainder 12 shutdowns. Such appreciation is less than IBM and American Express, and slightly underperformed the Dow Jones industrial average appreciation of 12.4%.

U.S. government shutdown effect on proctor & Gamble stock

Year Starting date (exclusive) Ending date (exclusive) Stock Price Change During Shutdown Stock Price Change 1-year after shutdown
1976 30-Sep 11-Oct -3.85% -9.62%
1977 30-Sep 13-Oct -4.26% 6.38%
1977 31-Oct 9-Nov -3.23% 2.15%
1977 30-Nov 9-Dec -1.05% 4.21%
1978 30-Sep 18-Oct 0.00% -8.00%
1979 30-Sep 12-Oct 2.17% -3.26%
1981 20-Nov 23-Nov 0.97% 49.51%
1982 30-Sep 2-Oct 1.47% 17.65%
1982 17-Dec 21-Dec 1.89% 1.89%
1983 10-Nov 14-Nov 1.84% 7.98%
1984 30-Sep 3-Oct 0.60% 5.95%
1984 3-Oct 5-Oct -4.14% 4.73%
1986 16-Oct 18-Oct -1.65% 19.01%
1987 18-Dec 20-Dec -1.67% -6.69%
1990 5-Oct 9-Oct -2.89% 7.98%
1995 13-Nov 19-Nov 4.03% 27.82%
1995/1996 15-Dec 6-Jan 2.01% 24.58%
2013 30-Sep NA 1.80%

Source - dates: Wikipedia ; values derived from data on Yahoo Finance

The Coca-Cola Company

Coca-Cola shares dropped by an average of about 1.07% during the past 17 shutdowns but performed quite well during the following 12 months, appreciating by an average of about 17.77% from the day before shutdown to one year thereafter.

When we excluded 5 shutdowns that occurred within less than a month of a previously accounted for shutdown, Coca-Cola shares had appreciated by an average of 18.60% during the remainder 12 shutdowns. Such appreciation is the second best appreciation for Buffett shares after IBM (excluding Wells Fargo for which we only analyzed the effect of the past 5 shutdowns).

U.S. government shutdown effect on Coca-Cola stock

Year Starting date (exclusive) Ending date (exclusive) Stock Price Change During Shutdown Stock Price Change 1-year after shutdown
1976 30-Sep 11-Oct 0.00% -3.23%
1977 30-Sep 13-Oct -3.33% 13.33%
1977 31-Oct 9-Nov 3.57% 14.29%
1977 30-Nov 9-Dec -3.45% 10.34%
1978 30-Sep 18-Oct -2.94% -11.76%
1979 30-Sep 12-Oct -3.33% -6.67%
1981 20-Nov 23-Nov 0.00% 36.36%
1982 30-Sep 2-Oct 2.44% 31.71%
1982 17-Dec 21-Dec -1.96% 13.73%
1983 10-Nov 14-Nov 0.00% 20.34%
1984 30-Sep 3-Oct 0.00% 17.39%
1984 3-Oct 5-Oct 0.00% 17.39%
1986 16-Oct 18-Oct -3.57% 6.43%
1987 18-Dec 20-Dec 0.00% 14.97%
1990 5-Oct 9-Oct -2.99% 61.98%
1995 13-Nov 19-Nov 1.82% 42.33%
1995/1996 15-Dec 6-Jan -4.45% 23.13%
2013 30-Sep NA -2.11%

Source - dates: Wikipedia ; values derived from data on Yahoo Finance

Wells Fargo & Company

We examined Wells Fargo shares performance during the past 5 government shutdowns. During such period, Wells Fargo shares dropped by an average of about 1% during the past 5 shutdowns but performed quite well during the following 12 months, appreciating by an average of about 52.17% from the day before shutdown to one year thereafter.

When we exclude the shutdown that occurred in 1995-1996 which was within less than a month of the previously accounted for shutdown, Wells Fargo shares had appreciated by an average of 57.50% during the remainder 4 shutdowns. Naturally, Wells Fargo share price appreciation has been also heavily impacted by the company's strong growth as it was being shaped into becoming one of the nation's leading banks.

U.S. government shutdown effect on Wells Fargo & Company

Year Starting date (exclusive) Ending date (exclusive) Stock Price Change During Shutdown Stock Price Change 1-year after shutdown
1986 16-Oct 18-Oct -2.99% 31.34%
1987 18-Dec 20-Dec 2.60% 32.47%
1990 5-Oct 9-Oct -1.98% 127.72%
1995 13-Nov 19-Nov -0.39% 38.46%
1995/1996 15-Dec 6-Jan -2.24% 30.84%
2013 30-Sep NA -2.32%

Source - dates: Wikipedia ; values derived from data on Yahoo Finance

Conclusion

Warren Buffett knows how to pick them. Even during past government shutdowns, most of Buffett's top picks have outperformed the Dow Jones industrial average within a year of the shutdown. Although Buffett's third largest holding IBM has witnessed a share price depreciation of about 4% year-to-date, these levels seem to provide a good opportunity for buying the shares and getting long. IBM has performed quite well within 1-year of past government shutdowns (although past performance is not necessarily an indication of future performance), while it currently offers attractive share price ratios including price/earning, price/book and price/sales, while it continues to show positive signs for cloud computing, software, middleware and mainframe revenues.

Investors may also chose to go along with Buffett on his other top holdings of American Express, Coca-Cola, Proctor & Gamble and Wells Fargo, all of which performed quite well in the year following past government shutdowns, although Proctor & Gamble had slightly trailed the performance of the Dow Jones industrial average, while all others exceeded it.

Source: Shutdown Impact On Buffett Top Holding IBM