Most people don’t buy based on the patterns of other investors, but nearly everyone will agree; Warren Buffett is not just any investor. The “Oracle of Omaha” routinely reads the market correctly, making investments that have turned Berkshire Hathaway (BRK.A) into a household name in investment circles and making Buffett one of the richest men in the world. For this reason, it is fair to speculate on his recent acquisitions of IBM and Wells Fargo (WFC) and wonder if you should do the same.
Under Buffett’s leadership, Berkshire Hathaway has become one of the largest corporations in the world. It has maintained an annual growth of its book value at over 20% for more than four decades, while positioning itself with vast amounts of capital and very little debt. In addition, it is one of the most expensive and highly sought-after companies on Wall Street. With this kind of record, the fact that Warren Buffett has been buying both IBM and Wells Fargo should be interesting to you for a number of reasons.
Buffett has a reputation of avoiding certain industries, and the banking and technologies have a reputation of being in that group. The Oracle of Omaha has focused on businesses that show sustained growth, a high level of corporate fiscal responsibility and excellent returns. While many did not see this move coming by Buffett, he saw something in both companies that allowed him to go against the norm and still get what he likes.
IBM – A Tech Company that Doesn’t Act Like a Tech Company
A lot of jaws dropped in the investment world when it was disclosed that Buffett now owns 5.5% of tech giant IBM. Even though the move seemed strange, Buffett acknowledged that this giant in the computer industry was doing things the right way. This decision and the nearly $11 billion investment it represents has caused many analysts who thought they were familiar with Buffett’s habits to take a second look.
After a fiscal cleanup around the start of the 21st century, IBM began moving. In spite of the economic struggles of the past few years, the company has stepped up its game, not losing money for nearly a decade. The company has posted a strong P/E over 14, an EPS of nearly 13 and a solid yield of 1.6%.
Not lost on Buffett is the fact that the company’s competitors have not been able to match this success. While Accenture PLC (ACN) has posted a strong P/E of over 16, its ESP is a meager 3.40; Microsoft (MSFT) has also recorded a solid P/E of 9.2 but an equally low ESP of 2.75. The bottom line with IBM is that Buffett found a solid producing, under-priced giant in a sector he typically avoids and he bought it. Based on the fundamentals, IBM is poised for continued success and other investors should consider picking it up as well.
Buffett Takes His Investments to the Bank
Wells Fargo & Company has been another beneficiary of a large cash infusion from Berkshire Hathaway. Already holding over 350 million shares in the banking giant, Buffett recently revealed that the company has continued to acquire more shares. Admitting that he likes the share price of Wells Fargo, there is obvious much more involved to catch this great investor’s attention.
There are some additional signs that seem to indicate another great Berkshire Hathaway acquisition. First, a big sell-off in August, 2011, pushed the stock price to its 52-week low; the shares have been overcoming some volatility to post steady gains. In addition to the declining share prices of competitors like Citigroup Inc (C) and Bank of American Corporation (BAC), there are other fundamentals that suggest the potential of Wells Fargo.
While Bank of America has posted a negative EPS of -0.31, both Wells Fargo and Citigroup have posted strong numbers of 2.70 and 3.75, respectively. In addition, Wells Fargo has surged to an excellent 8.99 P/E, besting the 6.65 recorded by Citigroup. Wells Fargo’s 0.48 dividend is much stronger than the 0.04 paid out by both Citigroup and Bank of America (BAC), and the company’s yield of 1.90% blows away both the 0.70% of Bank of American and the anemic 0.20% of Citigroup. With some experts seeing the stock making a 20% climb and pushing through its next resistance point, it’s very possible that Buffett is right again and now is the time for investors to look at grabbing this potential big gainer.
Watching a Master at Work
While not every investor can duplicate the results achieved by Warren Buffett, there are some basic aspects in his trading regimen that can be valuable to any investor. Looking for potential investments based on a proven history of success, consistent returns and a strong record of making sound financial decision, investors can incorporate new holdings into their portfolios. This can mean picking up a position in companies like IBM or Wells Fargo and reaping the benefits of their stability and earnings.
Even in the uncertain economic times, it is possible to find the type of investments that will keep a portfolio healthy and growing. This is a basic investing principle that has led Berkshire Hathaway to pick up stock in businesses like IBM and Wells Fargo. Much like Buffett does, looking for thriving companies that do a good job of managing their resources and offering dividends to their investors is a great start; this practice makes it possible to take advantage of a company’s solid fiscal standing to find a profit with purchasing its stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
