By Steven Morris
We take a look at six very successful stocks in Warren Buffett’s portfolio. We break down the advantages and potential of all six of them, with the main goal of crowning the best stock in the Berkshire Hathaway (BRK.A) CEO’s portfolio. Buffett has climbed into the rank of third richest man in the world, with a value investing philosophy that millions of investors follow.
The first stock that we will analyze is Wells Fargo Company (WFC). Wells Fargo is a big player in the banking industry and is well known for its great upper management. This was the management that made Wells Fargo bounce back from the banking demise we saw in the last two years. Wells Fargo saw stocks dip as low as $8.61when the industry began to implode.
Wells Fargo was one of the fastest recovering banks however, and had the company back into a 52 week average as quickly as four months later. Now the stock is trading at $28.91. With a price to earnings ratio of 11.9 and WFC declaring dividends five times in the last six months, it is easy to say this is a strong stock in Buffett’s portfolio.
Another strong point for current or potential WFC investors is in the last three quarters, revenue growth was double the industry average. This looks like a good opportunity for new buys for investors new to WFC, or even current WFC investors looking to add shares. At the very least it is a great long term hold. The guru Buffett echoes this confidence, since he has added more WFC shares twice in the last year.
Moving on to U.S. Bancorp (USB), another stock in Buffett’s portfolio with a big benefit of having a consistent and healthy dividend yield. USB is a banking company well known for being a standard bank, but it also sets itself apart from competitors in the industry by diversifying services to include a sizable asset management business and payment processing business, which account from more than half of the company’s total revenues.
Back to the dividends, the yield is 2% and the company is very predictable on how often and when it will give the dividends. This predictability and strong yield for shareholders is hugely important, since the stock is currently trading at $25.62. This is very close to our fair value calculation of $26.35, with a 12% discount rate. Clearly, with a unique product and service line for a bank, better times ahead of the industry, and a constant lucrative dividend yield, this is a nice stock in Buffett’s portfolio. USB looks to be a long term buy or hold, if you’re already sporting this company in your portfolio.
This next stock is not sporting dividends for investors and hasn’t since about ten years ago. It has really been crippled since 2006, when the housing bubble burst. USG Corporation (USG) is a company in the building materials industry. Its main product is wallboard. It is a massive player the industry and dominates the wallboard market to the tune of 25% market share. This makes USG the number one company in the U.S. for wallboard distribution; also USG is the second largest distributer of ceiling.
This all sounds great for investors and potential investors, but the industry is still so crippled and crawling out of the hole, that this market domination does not mean rapid rising stock prices or lucrative dividends. What this means, unfortunately for USG, is a current price of $14.22, dropping all the way from over 100 dollars a share early in 2006. USG currently is in a depressed market where the average revenue growth is -8.2%, but USG is looking at a miserable -17.3% in the same category. Also, USG is constantly underperforming the market in other important categories, such as return on equity, operating margin, and net margin. This stock looks like it could be a hold for investors who already have it, but would be a risky new purchase for any investor. The stock could continue to dip before it comes back up, as USG waits on the housing and building industry to completely bounce back.
Switching gears to a stock in Buffett’s portfolio that shows more promise, Coca-Cola Company (KO). Coca-Cola is best known for selling carbonated beverages containing syrup but also offers many products like water, juices and teas. With almost three fourths of the company's revenue generated outside the United States, Coke can be found in almost every country in the world. Most recently, Coke has been pushing into many third world markets located in Africa. This is one of the last places customers do not see Coke machines on every corner.
The KO stock shows great numbers starting with a current trade price of $68.51 that has seen a very healthy and consistent growth for the last ten years straight. KO has a price-to-earning ratio that sits at 19.2, and in a competitive market has grown revenues in the last three years at about double the industry average. Coke products already being served worldwide makes this a stock that will not grow rapidly, but it makes up for it in great dividends. The dividend yield is 2.8%. Clearly a strong stock for Buffett, we can at least expect him to hold onto or even buy more shares to strengthen his portfolio, and smart investors should do the same. KO stock makes up nearly 25% of Buffett’s currently managed assets.
KO dishes out a nice dividend that gets the attention of investors, but our next stock does even better in the category. Johnson and Johnson (JNJ) hands out a consistent dividend that yields a hefty 3.3%. JNJ is a company that operates in the drug manufacturing industry but has hundreds of different products, which fall into their sub categories: pharmaceutical, medical devices and diagnostics, and consumer. JNJ is well known in the finance world as a slow growth stock that has high company predictability.
Buffett like this predicable stock price mixed in with good dividends for investors so much that he almost doubled his shares in the year 2010. This is a great slow growth stock that will get investors consistent money for a long period of time. While investing in this stock, there is very low risk, which bodes well as a long time hold for current investors who could consider adding shares. If you are looking to add shares of JNJ for the first time, this would also be a great long term buy opportunity. Another reason we like this buy is that our fair value calculation with a 12% discount rate puts JNJ at $73.30 and it is currently undervalued.
As we searched for the best stock in Buffett’s portfolio with the best potential for profits for investors, we broke down several great stocks. But we saved the best for last in American Express Company (AXP). American Express Company has broken its credit card and lending business into a few smaller segments like three main businesses: U.S. card services, international card and global commercial services, and global network and merchant services. AXP has become very successful using these segments to place itself in a lucrative niche in the financial service markets where it owns its entire value chain. This gives it a closed looped network with products and services that allow it to have a competitive advantage on pricing.
AXP is currently trading under our fair value computation of $54.80, with a current trading price of $51.82. Another impressive number that draws Buffett to AXP is the nice dividend that this stock is accustomed to issuing, yielding 1.4%. AXP also has a great price-to-earnings ratio that sits at 14.0, and a ROE TTM measurement that is triple the industry average. With the nice dividend and the undervalued stock price that looks like it has room to grow, this looks like a great buy opportunity for current or new investors and we would not be surprised if the guru himself added more shares in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.