Nobody can do what Warren Buffett can do. But, fortunately, we can learn a lot from how he invests. He likes to teach, and we can eventually discover what positions he adds to his portfolio. Take a look at the following companies – all identified by Mr. Buffett as great businesses.
Coca Cola (NYSE:KO) is probably the best business in the world. Through his holding company, Berkshire Hathaway (BRK.A, BRK.B,) Warren Buffett owns approximately 9% of KO shares outstanding. KO has been in operation since 1886 and it has increased its dividend (almost!) every year since its inception. It is highly likely that 10, 15 or 20 years from now, citizens of planet Earth will still be drinking Coca-Cola, regardless of what happens in the eurozone.
KO runs its business operations like a well-oiled machine. The global economy is sputtering, but KO has invested $4 billion in China over the past year. KO earns more than $5 per share and trades at 12 times earnings – well below its historical average selling price at around 20 times earnings. Incredible this beverage behemoth has a 41% return on equity.
KO has a 27% profit margin and quarterly earnings growth of more than 8%. This means that it can produce and distribute its product with very little capital expense. Of all the businesses Buffet owns, he has explicitly stated that he has the most confidence in the long-term success of KO.
Wells Fargo Corporation (NYSE:WFC) is probably the cleanest banking operation in the United States. Its CEO, John Stumpf, runs a tight ship. Stumpf has spent his entire career at WFC and has shown no signs of desire to make a late career move. WFC bought Wachovia when the United States financial crisis was well underway, and this acquisition will render a critical opportunity for WFC to expand into the Eastern seaboard of the US. Mark my words: you will begin to notice the red and yellow WFC signs on an increasing number of street corners over the next few years.
At $25 a share, WFC currently sells at about book value, which is a reasonable purchase price for a strong American bank. Banks in the United States have historically sold at 2.5 or 3 times book value. WFC has 80 billion in deposits and it is the largest mortgage banker in the United States. Mr. Buffett has said that WFC is the “low cost provider of capital” in this country, which gives it a tremendous competitive advantage as a bank.
WFC is best of breed, and I believe that Mr. Buffett is currently carving a larger position in the company. He owns approximately 320 million shares (about 7% of the company) of WFC, amounting to 20% of his equity portfolio.
Shares of Bank of America (NYSE:BAC) have been abused in trading rallies as of lately. What is the reasonable price per share? Mr. Buffett seems to think that an ideal purchase price is somewhere in the low to mid $7 range.
BAC is the largest bank in the United States, but it is traded like an obscure, second-rate financial service shop. Mr. Buffett and Brian Moynihan struck a deal a few months ago, and the Oracle of Omaha bought $5 billion of preferred BAC shares.
I am optimistic of the long-term survival, and success, of BAC. But remember that Mr. Buffett bought preferred shares. You and I can’t get that same deal by buying the common stock.
Johnson and Johnson (NYSE:JNJ) is another solid American business that has been a long time favorite of Mr. Buffett. And it is priced at an attractive level. It currently trades at 12 times earnings. JNJ operates its business in 3 capacities: consumer products, health and medical device products, and drug development and research.
JNJ boasts a 17% profit margin and 25% operating margin. This business was founded in 1886 (the same year as KO) and currently pays a 3.6% dividend, a rate of return that currently trumps the 10 year US Treasury bill.
Warren Buffett owns a sizable interest in JNJ in the equity portion of his conglomerate – he owns approximately 1.5% of the company. Though JNJ has experienced difficulty in its health and consumer goods sector (Motrin, Acuvue and TruEyes contact lens recalls,) I believe the business will endure and provide shareholders with reasonable returns.
Gannett Co., Inc. (NYSE:GCI) publishes more than 80 daily American newspapers, including USA Today. GCI boasts a 9% profit margin on their operations, which is a significant accomplishment for a business in this industry.
GCI pays a 2.9% dividend and earns more than $2 per share. Trading at about 5 times earnings, GCI is cheap. Mr. Buffett owns about 1.7 million shares of GCI, but has lately decreased his position.
Despite the worries of publishing moving from ink into the electronic medium, GCI remains a great business that is selling at a fair price.
Take a cue from Warren Buffett and buy these great American companies while the price is right. Be sure and buy on one of these weird sell-off days when the ticker is red, not green, and everyone thinks the world is going to Hell in a hand basket. When Greece - a country nation an economy roughly the size of South Dakota - announces that it is on the precipice of total disaster, U.S. equity markets go haywire. Don’t buy into political excitement. Stay calm and focused - the aforementioned companies will remain, and they will be better in 10 years. We don’t know what will happen with Greece.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.