Warren Buffett is the world's most brilliant investment mind, amassing a $50 billion fortune over his lifetime and placing him among the richest men in the world. Buffett firmly believes in using the constant fluctuations of the market to his advantage while simultaneously seeking a safe position with acceptable risk. It is no surprise that the world pays attention to his investment decisions as it would be unwise not to glean what knowledge we can from the Berkshire Hathaway (BRK.A) chairman and apply it to our own investment strategies. The following stocks are all currently found in Warren Buffett's portfolio and are trading at a discount to fair value.
U.S Bancorp (USB) is one of the only banks to thrive in the financial meltdown and see its stock rebound in an extremely unfavorable environment for banks. Much of U.S Bancorp's success is due to smart underwriting and forward thinking in the midst of a crisis -- separating it ideologically from banks that made the kind of unwise underwriting decisions that caused the financial meltdown. Almost half of the bank's revenue is generated through fees due to its large asset management business. 2012 looks to be another good year for Bancorp, which has been able to find and seize opportunities through shaky economic times at it pulled in $3.3 billion in net profits in 2010 with a similar outlook through 2011. On a DCF basis using a 10% cost of equity, shares are worth $33, and now trade around $27.
General Electric (GE) is an extremely diverse company that excels in all of the markets in which it competes. The company operates in the areas of technology infrastructure, home appliances, energy and capital management. Over the past few years, the company has trimmed its fat and increased its margins, putting it in a position to make more significant gains in the future than it has in the past two years. From 2009 to the beginning of 2012, General Electric stock has risen from $7 to $19 per share, but are worth $23 on a DCF basis using a 10.5% cost of equity to adjust for financial risks.
Kraft Foods (KFT) is one of the largest producers of processed and packaged foods in the world and owns an armada of subsidiaries which include Nabisco, Oscar Mayer, Maxwell House, Jell-O and newly acquired Cadbury. Cadbury allows Kraft to expand into markets it has been unable to tap yet such as in candy and gum and the acquisition provides Cadbury with a more efficient supply chain. Kraft expects that the $19 billion spent on Cadbury will be worth every penny and Warren Buffett would seem to agree by holding shares. On a DCF basis, shares are worth $43 apiece.
Johnson & Johnson (JNJ) is world renowned as a leader in the medical supply industry and pharmaceuticals. The company also produces many consumer products from baby oil and first aid kits to other over the counter medicines and treatments. About a third of Johnson & Johnson's income comes from pharmaceuticals and the company boasts an exceptional research and development team that is responsible for many of the company's prior successes. Many hospitals across the nation depend on Johnson and Johnson medical equipment as well, giving the company a steady stream of income from multiple sources, a feat that Warren Buffett seems to have noticed. On a DCF basis, shares are worth $72 using a 9.5% cost of equity given J&J's stability and ease of access to capital.
Costco (COST) is on the verge of greatness after establishing an extremely efficient supply chain and strong influence over its suppliers. The company has thrived during the recession as consumers continue to seek ways to cut budgets and buy more for less. The growing acceptance of warehouse discount clubs internationally is working to Costco's favor and placing it in position to pop anytime in the coming years as it continues to siphon customers from its retail competition and expand its warehouse clubs into the global market. On a DCF basis, Costco shares are worth $88 apiece.
Now is the perfect time to act on these stocks, which are all geared to show positive gains in 2012 and the coming years. Each pick has shown consistent gains over the past three years without any signs of slowing. 2012 could be the year that sends a few of these companies through the ceiling and I feel that indecisiveness on part of investors who choose to watch and wait could prove disastrous while those who choose to act will post significant gains. When I evaluate any of Warren Buffett's picks, however, I don't feel that my opinion has much weight in comparison- because Warren Buffett is a much richer man than I.