As CEO of Berkshire Hathaway, Inc., (BRK.A) Warren Buffett has made investments that have turned him into a multi-billionaire. Over time, Mr. Buffett made a fortune by buying undervalued stocks and then he patiently waited, collected strong dividends and let the market recognize the true value over time. As a value investor, he typically shuns technology companies and likes to buy into simple business models with strong brands and high barriers to entry. For example, it would be impossible for a new technology to come out with a new product that makes Coca Cola (KO) products obsolete. It would also be very hard for a new company to pose a competitive threat to a company like Coca Cola, especially since it has the ability to buy any fast growing beverage company, as it often does.
Recently, a couple of Warren Buffett's favorite stocks have come under pressure and this is giving investors a great opportunity to buy some high quality companies with solid dividends, on the cheap. Here is a closer look at two companies facing a short-term challenges that investors should take advantage of now:
The Coca Cola Company is a leading beverage company with well known brands such as Sprite, Vitamin Water, Minute Maid Orange Juice, Dasani and more. This stock has been trending lower ever since a number of companies found fungicide in orange juice imports. Coca Cola reported to the U.S. Food and Drug Administration (FDA) that it had found a fungicide called "carbendazim" in its orange juice. This fungicide is not legal in the United States, but it is widely used in countries like Brazil, in order to retard mold growth on oranges. Some juice industry groups have asked the FDA to raise the limits for acceptable levels of fungicide in orange juice tests, but those requests have been denied. This issue has created some negative headlines for companies like Coca Cola and it could increase expenses, if orange juice can no longer be imported at low prices from Brazil. However, this issue appears to be a non-event in the long-term since Coca Cola is extremely well diversified. The orange juice issue will most likely be favorably resolved for the company, and the stock, which was recently trading over $70 per share, just became a better buy at about $67.50. This is the kind of stock that lets you collect a solid dividend and sleep well at night. Buying dips is likely to lead to capital gains in the future when the orange juice issue fades from the headlines.
Here are some key points for KO:
Current share price: $67.53
The 52-week range is $61.29 to $71.77
Earnings estimates for 2011: $3.82 per share
Earnings estimates for 2012: $4.10 per share
Annual dividend: $1.88 per share, which yields 2.8%
ConocoPhillips (COP) explores, produces, refines, and transports oil, natural gas, and other fuels. Refinery margins have been weak and Conoco has very significant refining operations. In fact, the refining business is so large for Conoco that it plans to separate that business and spin it off to shareholders. The company will complete this plan around the second quarter of 2012. The refining company will be called "Phillips 66." Before Conoco released earnings a few days ago, the stock was trading around $74, but the financial results were weaker than expected and this caused the stock to drop to about $68. Now the shares offer a dividend yield of almost 4% and the stock is at the lower-end of its recent trading range. In the past few weeks the stock has been bouncing in a range between $68 and $75. That means it is likely to hold up around $68 per share and head higher in the long run. Short-term business challenges that create pullbacks in solid stocks are great buying opportunities. It makes sense to follow Mr. Buffett into this stock. With a strong yield and a price-to-earnings ratio of just eight times earnings, this is a value stock with significant upside.
Here are some key points for COP:
Current share price: $68.21
The 52-week range is $58.65 to $81.80
Earnings estimates for 2011: $8.70 per share
Earnings estimates for 2012: $8.45 per share
Annual dividend: $2.64 per share, which yields 3.8%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclosure: I am long COP.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
