Like millions of investors, I closely follow the investing decisions of Warren Buffett. Additionally, I track his stock picks and routinely perform relative valuation to determine if any firm in his portfolio is particularly attractive at current levels. I recently completed such an analysis and in this article, I will be presenting 5 stocks which are most attractively priced in terms of return potential. The analysis was performed using the latest available SEC filings of Berkshire Hathaway Inc. (BRK.A). Berkshire held positions in 33 companies at the end of Q3 2011, with Coca-Cola (KO) being its largest holding, followed by IBM (IBM).
DTV is the most attractive name on my list. Berkshire held 4.25 million shares of DTV at the end of Q3. It was a new purchase made by Berkshire during the quarter. The stock traded in the range of $41 and $53 during this time period and exchanged hands for $45.51 at market close on February 10, 2012.
The company has a market cap of $32 billion. It is expected to grow its earnings at an annual rate of 23%, easily beating the projected 16% growth rate of the industry. Applying my estimated P/E of 13 to 2012 EPS estimate of $4,41, my price target of $57 a share is obtained. A return of 26% is possible from current levels.
GlaxoSmithKline plc (GSK)
Buffett held 1,510,500 shares of GSK stock at the end of Q3 2011. This British company has a market capitalization of $113 billion and a dividend yield of over 5%. The company's earnings fell at an annual rate of 3% during the last 5 years. Going forward, GSK is projected to grow at a 16% clip over the few years. My target price of $53 is obtained by applying an industry average multiple of 15.5 to 2012 EPS estimate of $3.45. A return of 24% (including dividends) is possible from current levels.
Ingersoll-Rand PLC (IR)
Ingersoll-Rand is engaged in the design, manufacture, sale and service of commercial and industrial products.
IR is currently a $11.68 billion company by market capitalization and has a dividend yield of 1.7%. The stock is up 25% YTD compared to the 7% increase in the S&P500 index. Analysts expect the firm to grow at an annual rate of 11% over the long term compared to the 18% growth rate of the diversified machinery industry. Its earnings contracted at an annual rate of 9% during the last 5 years.
Buffett held 636,600 shares of IR stock at the end of Q3, 2011. Applying a P/E of 15 to my calendar year 2012 EPS estimate of $3.04, my price target of $46 is obtained. A return of 20% is possible from current levels.
United Parcel Services, Inc. (UPS)
Buffett held 1.43 million shares of UPS shares at the end of Q3 2011. The company has a market capitalization of $74 billion compared to its chief rival FedEx (FDX) which has a $30 billion market cap. The company also sports a very respectable dividend yield of 3%.
The stock is up 4% over the last 5 years. During this time period, the company's earnings were essentially flat. Going forward, analysts expect a growth rate of 13% per annum. Applying a P/E of 18 to 2012 EPS estimate of $4.84, my price target of $87 is obtained. Including dividends, a return of 17% is possible from current levels.
CVS Caremark Corporation (CVS)
Buffett initiated a new position in CVS during Q3 2011 by acquiring 5.66 million shares. The stock traded in the range of $32 and $37 during this time period and currently trades for $43.
CVS increased its earnings at an annual rate of 12% during the last 5 years and is projected to maintain this growth rate over the next 5 years. My price target of $50 is obtained by applying a P/E of 15.2 to my 2012 EPS estimate of $3.27. A return of 16% (including dividends) is possible from current levels.
Of the companies listed above, I am most intrigued by DTV.
Disclaimer: As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.