Back in April I wrote an article that highlighted Warren Buffett's Top Ten Stocks. I also briefly explained the financial criteria that Buffett uses to pick stocks. In today’s article, I will lay out the next 10 ten stocks in the Berkshire Hathaway Fund (BRK.A) (the back half of the top 20, if you will). Warren Buffett has proven to beat the market over time with his strategic stock picking methods.
Washington Post (WPO)
The Washington Post is more than just a D.C. area newspaper. It operates as a diversified education and media company worldwide. The education portion of the business provides tutoring, post-secondary education, professional training, English language programs, and fixed facility colleges. The media portion offers: cable TV services, internet, and phone services. It also operates television broadcasting in six U.S. cities.
WPO has posted average annual earnings of -8.65% in the past five years. Despite this recent negative growth, it is expected to grow earnings annually at 29.4% for the next five years. Furthermore, its past earnings woes have created value in the company's stock. Its trailing PE is 13.13 and the forward PE is 14.46. WPO’s PEG is very attractive at 0.44. The stock price of $316 is actually trading under its book value per share of $342 – a nice value. It also pays a dividend of 2.9%. If the company hits its high earnings estimates, the total annual yield would be 32.3% (earnings + dividends) – not too shabby.
M&T Bank Corp. (MTB)
MTB is a Buffalo, NY based bank that provides commercial and retail banking services to individuals and businesses. It operates 738 banking offices in seven U.S. states, the District of Columbia, Ontario, and in the Cayman Islands.
MTB pays a nice 3.9% dividend. It is well valued with a forward PE of 9.54 and a PEG of 1.17. The stock currently trades at only 1.07 times book value per share, reinforcing a strong value. Although the company has experience negative earnings growth in the past five years, it is expected to grow earnings annually at 8.83% for the next five years. Its earnings growth combined with the 3.9% dividend should give investors a total annual yield of 12.73%
Costco Wholesale Corp. (COST)
Costco is a company that operates membership warehouse clubs in the U.S. and internationally. It currently operates 581 warehouses and the online commerce websites, Costco.com and Costco.ca. Costco sells everything from alcoholic beverages to Zebra brand pens, caskets and wind turbines.
The company's financials look solid, but they don’t initially appear greatly valued according to the forward PE of 21.05 and PEG of 1.86. However, the company's stock is trading at only 2.95 times book value per share which does show a nice value. Costco’s operating cash flow of $2.87 billion is higher than its debt of $2.15 billion (why can’t the government operate that efficiently?). It also has $6.22 billion of total cash on hand. Costco pays a modest dividend of 1.2%. Since it's expected to grow earnings annually at 12.74% for the next five years, look for Costco to beat the market’s returns.
USG Corporation (USG)
USG is a manufacturer of gypsum based products for use in various building components such as walls, ceilings, and floors. It also produces gypsum based products for agricultural and industrial customers for applications such as fireproofing, soil conditioning, road repair, and ceramics.
USG’s stock was decimated since the housing bubble popped. The stock went from over $100 dollars a share at the peak of the housing market down to the single digits. Buffett first bought it when it fell to around $50 per share. Although the company has struggled with negative earnings that averaged -$68.97 annually in the last five years, earnings are expected to growat 49.08% annually for the next five years. The current stock price of $9.11 is trading at only 1.82 times book value per share.
USG will probably turn out to be a good buy and hold for the long term (10 – 20 years). New homes and business buildings will be needed as the economy recovers and USG will continue to supply some of the main components of these structures.
Torchmark Corporation (TMK)
Torchmark is a holding company specializing in life and supplemental health insurance for middle income households. It sells term life, whole life, and other insurance policies. It also provides various health insurance products such as: juvenile and senior life coverage, medicare supplements, hospital surgical plans, cancer plans, and accident plans sold to individuals under age 65. Torchmark also offers a variety of annuity programs.
Torchmark is well valued with a forward PE of 7.13, a PEG of 0.89, and with its stock trading just a dollar above book value per share. It has a profit margin of 15.44% and an operating margin of 25.99%. Torchmark pays a dividend of 1.4%. The company is expected to grow earnings annually at 9% for the next five years. Expect this company to approximately match the returns of the S&P 500.
Sanofi Aventis (SNY)
Sanofi is involved in the development and distribution of pharmaceuticals. It is responsible for about 39 drugs which includes these well-known names: Allegra, Ambien, Avapro, Nasacort, and Plavix.
Sanofi pays a nice dividend of 3.8%. The company has a healthy profit margin of 13.35% and an operating margin of 22.16%. Its stock is trading at only 1.25 times book value per share. It has grown earnings annually at 10.21% in the last five years, but is only expected to grow earnings at 0.17% for the next five years, so it may lag the market in terms of stock appreciation.
General Electric (GE)
General Electric operates as a diverse conglomerate in technology, service, and finance. Its Energy segment provides: wind, gas, and steam turbines; generators; nuclear reactors; fuel; motors and control systems; and water treatment solutions. Its healthcare segment provides: medical imaging, diagnostics, disease research, patient monitoring systems, drug discovery, and biopharmaceutical manufacturing technologies. GE’s capital segment provides commercial loans and leases, home loans, credit cards, personal loans, and other financial services.
Just like most of Warren Buffett’s stocks, GE also trades at a great value. It has a forward PE of 9.81 and a PEG of 0.79. The stock price of $15.59 is trading at just 1.29 times book value per share. GE does have a lot of debt at $471.97 billion, but it also has a lot of total cash at $91.05 billion. With its operating cash flow of $34.74 billion, it will have no problems paying off its debt.
GE pays a nice dividend of 3.8%. The company is also expected to grow earnings annually at 14.54% for the next five years. This brings its total annual yield to a generous 18.34% (dividends + earnings), which should beat the market by about 7% – 8% annually. Since it is so well diversified into many different businesses, owning GE stock has been considered the equivalent to owning a diverse mix of stocks all in one.
The well-known credit card company is not Buffett’s only owned credit card company. He also owns stock in American Express (AXP). Mastercard provides transaction processing and related services to customers to support its credit, deposit access, electronic cash, ATM programs, and travelers cheque programs. As the banks that are associated with the credit cards take on most of the credit risk, Mastercard is insulated from poor lenders and provides minimal risk to shareholders. Mastercard provides a moat around its business for shareholders in the form of predictable earnings and minimal downside risk. This ‘moat’ is one of Buffett’s key criteria’s for owning a stock.
Mastercard stock has more than doubled from its 2009 lows. Although the stock trades at over 7 times book value per share, it still boasts a PEG under 1 at 0.98 due to its high earnings growth. The company has grown earnings annually at 41.91% in the last five years and is expected to grow them at 19.07% annually for the next five years. If these estimates are met consistently, its stock could be over $800 per share five years from now.
United Parcel Service (UPS)
This well-known logistics company operates a fleet of approximately 99,800 package vehicles and 527 aircraft to transport freight in the U.S. and throughout the world. It can be considered a common denominator for the many businesses that make up the economy as most use its services. The company is currently promoting its ‘3 for all’ program, which is pick 3 products or services and save 30% to increase business.
UPS shows a solid value with a forward PE of 13.19 and a PEG of 1.29. It is expected to grow earnings annually at 11.79% for the next five years. When its earnings growth is combined with its dividend of 3.2%, look for UPS to beat the market’s returns by 1% - 3% per year.
Verisk Analytics (VRSK)
Verisk is a New Jersey based company that provides data, analytics methods, and decision support systems to mortgage, property & casualty insurance, and healthcare industries. Its services allow customers to select and price risk, predict loss, and detect fraud before and after events.
Currently, Verisk does not look like a great value according to its forward PE of 18.19, but the company's PEG of 1.44 is not terrible. It does have healthy profit margins of 21.32% and operating margins of 38.23%. Its current ratio looks a little dicey as it is under 1 at 0.58 – this means that its current liabilities are higher than its current assets. On a positive note, Verisk is expected to grow earnings annually at 14.58% for the next five years. If it can meet or beat these estimates, it’s likely that Verisk will beat the market’s performance by about 4% annually.
Unfortunately, Berkshire Hathaway Inc. does not pay dividends. So, as an alternative to just buying Berkshire stock, you can pick a select mix of individual Berkshire stocks of your own choosing and reap the benefits of the dividends as well. As with most of Buffett stocks, there are a lot of good choices here. Most of these should grow earnings consistently and beat the market with minimal downside risk over a long holding period (5, 10, or 20 years or more). Pick the ones that you feel most comfortable understanding, and those which fit in to your investment style.
Disclosure: I am long GE.