Warren Buffett was on CNBC last week discussing his performance since the end of the financial crisis in light of his decision to exchange 10.7mm warrants made during the depths of the crisis for stock in General Electric (GE). I recently covered why I thought this was a good investment. What struck me is that the Oracle of Omaha stated his overall performance was no better than someone who would have bought and held an index fund since the end of the crisis. He has also mentioned this recently in other venues.
True, the legendary investor took much less risk than the average investor due to some of the "sweetheart" financing deals he was able to attain from GE as well as Goldman Sachs (GS), Bank of America (BAC) and others. However, I thought his return would have been substantially better given his long-term track record, ability to provide his sort of financing in the crisis and the bargains that were available in the depths of the market meltdown.
I was truly surprised by this revelation, so I decided to do some further digging. It seems the noted value investor's four largest holdings, which Barron's divulged this weekend, currently are unimpressive especially from a short-term investing horizon. Most of these large holdings seem fully or overvalued right now but let's take a look at Mr. Buffett's holdings and how I would assess their near- and medium-term potential.
American Express (AXP) - This well-known financial services concern has been a big winner over the past half-decade for the Oracle of Omaha as the shares have risen from under $10 a share at the depths of the financial crisis to $80 a share currently.
The momentum seems to be continuing as the New York-based financial giant posted a solid earnings report that beat the consensus on both the top and the bottom line. Earnings were up 15% Y/Y on back of an 8% increase in card member spending.
The challenge for short-term shareholders is that the stock has run up better than one-third so far in 2013. AXP now sells for just under 15x forward earnings, which is right at its five-year average (14.9). The stock also is just over the median price target of $78 a share that the 22 analysts that follow the stock have on the shares. With a paltry 1.1% dividend return, there is no compelling reason for non-holders to get involved at these levels. HOLD
Coca-Cola (KO) - The huge multinational beverage giant has been one of Mr. Buffett's core long-term holdings for decades and has provided him with stellar returns since he bought his first stake in it. However, the company is under pressure from very weak soda sales and increasing activist efforts to curtail sugary drinks (NYC, Mexico, etc). It does not have a growing snack business to fall back on in tough times like its main competitor Pepsico (PEP) either.
On the bright side, the stock does pay an almost 3 percent dividend yield (2.9%). The company has also doubled its dividend payout over the past eight years. Sales growth is very tepid and should post a slight decline in this fiscal year and analysts only expect a 3% to 4% increase in FY2014. Despite dismal revenue growth the shares fetch some 17.5x forward earnings, a slight premium to its five-year average (16.7). AVOID
Wells Fargo (WFC) - Like most of the major banks in the last few months, the company has been under pressure recently. Mortgage originations have declined precipitously as interest rates have posted a big rise since May and the regulatory environment continues to be a headwind.
On the bright side, interest rates have started to decline again as the Federal Reserve has postponed "tapering" and the government shutdown has ended, at least for the moment. WFC is not expensive at under 11x forward earnings, a discount to its five-year average valuation (12.5). The shares are yielding almost 3 percent (2.8%) as well. The bank is by far the largest mortgage originator in the country and should continue to benefit longer term as the housing market returns to health. I would be a buyer on any decent pullbacks. ACCUMULATE
IBM Corporation (IBM) - Regular readers especially on TheStreet know I have been negative on "Big Blue" for quite some time calling it no better than "Dead Money" on more than one occasion. The company has done a marvelous job over the last decade moving from a business model that relied on hardware for 80% of revenue to one that gets 80% of revenue from higher margin services and software. However that story is mostly over.
The company has not increased sales over the past five years and revenues have posted sequential declines for six straight quarters after last week's disappointing earnings report. Earnings have been buoyed by consistent buybacks of the stock (most that was bought in the last two years were at higher price levels).
The last earnings report hit like a bomb on the street as it earnings report was dismal. Free cash flow was down $900mm to $2.2B Y/Y, Chinese sales were down 22% Y/Y and Unix server sales plunged 38% Y/Y. UBS has already downgraded the stock to "Neutral" as a result of these poor results and I would expect other analyst firms to follow. Until the company can halt its slide in sales, there is no good reason to own the stock in my opinion. AVOID
All in all, I am not currently enamored about the top four holdings currently in Mr. Buffett's portfolio. I think he will do much better with his recent General Electric investment, which he just exchanged warrants for. In addition, I think his major stake (700mm warrants) in Bank of America is liable to be a best performer long term as well, which I went into detail on the other day.