The name Warren Buffett is synonymous with great investment managers. His moves in the market are often watched and dealt on by investors around the world. Here we look at a few of his latest buys and see if we think he has it right this time:
Wells Fargo & Company (WFC): Shares are trading at $25.42 at the time of writing, in the middle of their 52-week trading range of $22.58 to $34.25. At the current market price, the company is capitalized at $134.21 billion. Earnings per share for the last year were $2.58, It paid a dividend of $0.48 (a yield of 2.00%). tt added 9,696,461 shares to his portfolio in the second quarter of this year, taking his holding to 352,327,608.
Banks need capital to lend, and the Fed is certainly helping with its seemingly continuous quantitative easing program. But this huge and ongoing monetary easing is masking the inherent problems within the economy: there is a shortage of money everywhere except at the top. This will hit all banks, particularly with the economy not recovering as many had thought it would. Wells Fargo’s business is predominantly US based. At this stage of the economic cycle, it would seem prudent to look at a bank that has a far higher international exposure. JP Morgan (JPM) makes it money more internationally, with a slightly more aggressive operating margin of 39.91% versus Wells Fargo’s 34.58%. It also produces a better dividend yield of 2.80%, and has a less demanding price to earnings ratio of 8.04 versus 9.85. For all these reasons, I would rather hold JP Morgan than Wells Fargo shares.
Verisk Analytics Inc (VRSK): Shares are trading at $34.42 at the time of writing, at the upper end of their 52-week trading range of $27.04 to $35.42. At the current market price, the company is capitalized at $5.67 billion. Earnings per share for the last year were $1.45, placing the shares on a price to earnings ratio of 23.72. It pays no dividend. Buffett bought into the shares in the second quarter of this year, and holds 2,101,125 shares.
Verisk provides risk management systems to companies in the mortgage, healthcare, and property and casualty insurance industries. Buffett’s Berkshire Hathaway company operates mainly in the property and casualty industry. Verisk has great pricing power, which leads it to produce operating margin numbers of 38.23% as against its peer group average of 6.97%. Its cash flow is good, and quarterly (year on year) revenue growth of around 16.2% shows good business and sales by management in this climate. However, shares may be held back by its need to pay down its debt of over $1 billion. A hold for better times to come.
Mastercard Inc (MA): Shares are trading at $327.37 at the time of writing, as against their 52-week trading range of $191.00 to $340.4254.33. Earnings per share for the last year were $16.14, placing the shares on a price to earnings ratio of 20.29. It paid a dividend last year of $0.60, a yield of 0.20%. Having added to his position in the second quarter, Buffett now owns 405,000 shares
People will use credit to drive their lifestyle in our consumer economy. Mastercard, along with American Express (AXP) and Visa (V), is one of the giants in this market place. It outguns American Express, which trades on a price to earnings ratio of 12.61, with its operations producing an operating margin of 20.92% and earnings per share of $3.85. However Mastercard’s operating margin of 51.51% is a little lower than Visa’s 58.38%, and Visa is ahead in the chip and pin environment also. Mastercard may have to use some of its great cash flow to develop its products, and this could be a weigh on its shares. Visa’s lower price to earnings ratio is unjustified, and they would be my pick of these three credit giants.
Dollar General Corp (DG): Shares are trading at $33.79 at the time of writing, as against their 52-week trading range of $26.64 to $35.09. At the current market price, the company is capitalized at $11.54 billion. Earnings per share for the last fiscal year were $1.88, putting the shares on a price to earnings ratio of 17.97. Buffett owns 1.497,800 shares. As the economy contracts, discount stores are in vogue. Companies like Dollar General and Costco (COST) are catching the traditional stores of Wal-Mart (WMT) and Target (TGT). Costco trades on a price to earnings ratio of 24.30 and pays a dividend of 1.20%. Dollar General produces an operating margin of 9.87% from its 9500 stores, whilst Costco’s is a far more modest 2.79%. Of the two, on this basis I prefer the lower rated Dollar General, and consider this to be a pretty good buy in this economic climate.