Here are 5 stocks on my long-term watch list that are trading at prices that I find attractive:
- Berkshire Hathaway (BRK.A, BRK.B). I can’t believe that Berkshire Hathaway is only trading hands at $68 per share. The last time Berkshire was trading at this close to book value, the stock tripled within the next decade. Sure, it might be a bit on the optimistic side to assume that Buffett will be running Berkshire in a decade, but the historic “Buffett multiple” has been 1.5-1.75x book value. It’s hard to see how Berkshire Hathaway investors would do poorly over the long-term by purchasing shares of the conglomerate at less than 1.2x book value.
- PepsiCo (PEP). People often like to have conversations about which company is better: Coca-Cola (KO) or Pepsi (PEP). The correct answer to the question, of course, is that it can be either, depending on the price. Coke is currently trading at around $70 per share, and Pepsi is at around $62. If Coke were trading at $50 per share, I’d say Coke was the better buy, but at today’s prices, Pepsi stock looks particularly compelling. You can get in today at a 3.30% yield, and it’s only paying about half its earnings out as dividends. Pepsi is one of the few companies for whom I don’t mind daring to assume 10% growth, and if you can lock-in a 3.30% dividend yield, I think you’ll be positioning yourself to do well.
- General Electric (GE). I’m surprised GE is trading at only a little above $15 per share, or about 12x earnings. The company is currently paying out a dividend just shy of 4%, and it’s only paying out 47% of its earnings as dividends. GE’s stock has been stuck in a rut this past decade; but then again, GE was trading at 60x earnings in 2001, and GE Capital wreaked havoc on the firm during the credit crisis. Now that GE’s valuation is much lower than during its bubble days at the start of the decade, and it’s looking like GE Capital is transforming from being a liability to an asset, it might be time to give shares of GE a look. The 4% yield is catching my attention right now, and it looks like it’s still got some running room left to grow.
- Wells Fargo (WFC). All financials are getting clobbered these days. Warren Buffett was gobbling up shares of Wells Fargo by the barrel in the second quarter, when the stock was trading at $28 per share, and I can only imagine how much he must be buying now. If you think the financial sector will ever recover, Wells Fargo ought to be your best bet. Right now, it’s trading at only 9.4x earnings, giving you a 10.7% earnings yield. Anytime you can get buy a blue chip at over a 10% earnings yield, I think you’re poised to do well. And I think that Wells Fargo’s earnings are depressed compared to where they will be in five years. We’ve seen this before. Buffett loaded up on shares of Wells Fargo in the early ‘90s when no one would touch the stock because of a financial crisis (these tend to happen every 15-20 years or so), and the company delivered solid gains from there. Wells Fargo and JPMorgan (JPM) strike me as the highest-quality big banks, and I find Wells Fargo shares below $24 quite compelling.
- Exxon Mobil (XOM). It’ surprising to see Exxon Mobil trading at such a low valuation of less than 10x earnings. The company is generating $40 billion profits a year, and most people think that the price of oil will go up in the long-term. And when you factor in Exxon’s aggressive share buyback program, these shares are definitely worth a look at current prices. Like Wells Fargo, Exxon is currently offering new investors an earning yield of 10.7%. It’s crazy to think that the most profitable firm in the entire country is offering a 10.7% yield. My best guess is that the price of oil will be higher five years from now than it is today, and I think that Exxon is doing just fine generating profits at today’s oil prices. Not only will Exxon hedge against inflation, but it will also help you combat a devaluing dollar.
In short summary: I like Berkshire because of how close it is trading to its book value (and the fact that you get Buffett working for you). I like Pepsi because of its long history of dividend growth and the current 3.30% yield. I think both GE and WFC have depressed share prices because everyone is scared of financials (and I like GE’s near 4% yield and think WFC has the potential to significantly raise its dividend going forward). Finally, the thought of adding Exxon at an almost 11% earnings yield seems particularly intriguing. These are some of my favorite American firms, and they’re trading at prices that I think set up potential investors to beat the S&P 500 over the coming decade.