The following is a list of five low P/E stocks among Warren Buffett's top holdings.
Wells Fargo & Company
General Dynamics Corp.
General Electric Co.
Source: 13F Filing
I like Wells Fargo and Sanofi Aventis the most among above the above stocks and believe they are likely to give good risk-adjusted returns going forward. However, I would avoid DirectTV, General Dynamics and GE.
Wells Fargo and Company provides retail, commercial and corporate banking services primarily in the United States. It operates in three segments; Community Banking, Wholesale Baking and Wealth, Brokerage and Retirement.
WFC reported fourth-quarter EPS of $0.73 against the market consensus of $0.72. Revenue of $20.1 billion improved 6% quarter-quarter driven by mortgage results and the spread income fee. Net Interest Income was also better than expected and the loan growth was positive. A combination of lower funding costs and an increase in non-interest bearing deposits has resulted in better interest margins.
WFC remains one of the safest large-cap banking stocks with a relatively strong balance sheet. Its business fundamentals are going in the right direction with improved core loan growth and healthy deposits growth. WFC's asset quality is stable and NPAs reduced by $879 million last quarter. Its capital ratios also continue to improve: Tier 1 common ratio at the end of Q4 was 7.49% under Basel III standards, up by 9bp quarter-quarter, while under Basel I it was 9.46%, up by 12bp quarter-quarter.
WFC has also entered into an agreement to buy back 5.6 million shares in Q1 2012. While high operating expenses are a concern, the management reiterated that expense improvement is expected to occur in 2012. I recommend going long on the stock from a medium- to long-term perspective.
Sanofi is a global pharmaceutical company with its headquarters in Paris, France. It has five divisions: Pharmaceuticals, Vaccines, Generics, Animal Health and Consumer Health. Sanofi is trading at a discount to its peers at a forward P/E of 9x and has a dividend yield of ~3.8%. I believe the company is undervalued and the market is not pricing its 2013 onward growth outlook driven by new businesses: vaccines, emerging markets, consumer health, animal health, generics.
Three stocks I don't like from the above list are DirecTV, General Dynamics and GE. I would recommend selling these stocks. DirecTV Inc. provides digital television entertainment in the United States and Latin America. Its services include Direct-to-Home digital television, multi channel video programming distribution and video-on-demand. It also offers 160 national high-definition channels and 4 3D channels.
The U.S. pay TV market has reached a mature stage. There is also stiff competition from cable operators. Going forward, DTV is expected to focus less on subscriber growth and more on retention and profitability. In addition, with new players such as AT&T (NYSE:T) and Verizon (NYSE:VZ) entering this saturated market with new offerings, DTV might even see subscriber losses. I believe this will result in a slower growth for the company going forward.
Also, DTV's programming expense and margins outlook is challenging. It is expected that increasing programming costs will have an incremental negative effect on the margins. Further, internet TV may pose a risk in the long term and the multiples for the pay TV industry may fall if the subscriber base declines.
In addtion to DTV, I am not too bullish on GE and General Dynamics either. General Electric is likely to see headwinds from weak pricing, a difficult European environment and decelerating growth in emerging markets. At the current price, the risk reward ratio appears to be skewed to the downside.
I don't like General Dynamics given its exposure toward the defense end market. Defense spending in the U.S. is expected to be under pressure for the next several years as the government cuts expenditures to improve deteriorating fiscal condition. This is likely to pressure earnings as well as lead to negative sentiments on the industry causing multiple compression for defense stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.