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. (NYSE:BRK.A). Berkshire held positions in 33 companies at the end of Q3 2011, with Coca-Cola (NYSE:KO) being its largest holding, followed by IBM (NYSE: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 (NYSE: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 (NYSE: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. (NYSE: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 (NYSE: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 (NYSE: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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research.