5 Stocks Buffett's Letter Gives A Thumbs-Up

Includes: BAC, CSX, IBM, KO, WFC
by: MyPlanIQ

We continue to look for stock ideas for the long term investor and Matt Koppenheffer summarizes the picks that Warren Buffett highlights in his annual letter. There is nothing that can be added to what it means to be selected by the Oracle from Omaha, and probably these stocks will have a pop from his recommendation; however, it is worth investigating them.

  • IBM (NYSE:IBM): Buffett's company took a hefty stake in IBM, which was driven by Buffett himself
  • Wells Fargo (NYSE:WFC) was one of those referenced in his statement "these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects."
  • Bank of America (NYSE:BAC) has been through the wringer but Buffett gives the CEO credit for nurturing a huge and attractive underlying business that will endure after the current are consigend to history.
  • CSX (NYSE:CSX) is a proxy for BNSF -- which Berkshire owns. So what applies to BNSF applies to CSX, and they are approximately the same size.
  • Procter & Gamble (NYSE:PG) is a proxy Matt slipped in for Coca-Cola (NYSE:KO) or Wrigley, which I will replace with Coke, as that is what was referenced.
  • Buffett notes that the simple approach of "buy commodities, sell brands" has "long been a formula for business success."

This is a list of well known names, but the banks will probably weigh down short term performance. In any case, it will be interesting to measure against our dividend-bearing ETF portfolio:

Asset Fund in this portfolio
REAL ESTATE (NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
Emerging Market (NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY (NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY (NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
High Yield Bond (NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
Click to enlarge

Portfolio Performance Comparison

Portfolio/Fund Name YTD
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 1% 1% 14% 10% 77% 8% 61%
5 Stocks Buffett Gives the Green Light in His 2012 Letter 4% 1% 4% 34% 134% 7% 21%
Retirement Income ETFs Strategic Asset Allocation Moderate 5% 3% 18% 20% 133% 3% 12%
Click to enlarge

We can see from the table that the returns are decent over all the time horizons we examine but that the Sharpe ratios are lower than the ETF portfolios indicating that there is additional risk (volatility) for these stocks. This is not a surprise as the banking stocks will have been through a torrid time over the past few years. In addition, this is only a selection of five stocks which will have greater volatility than a series of indexed ETFs.

It is a question of trust as to whether the two bank selections will start to thrive. That is something we each have to consider.

Three Month Chart One Year Chart Three Year Chart Five Year Chart

We can see that this selection took a hammering in 2009 and suffered again towards the end of 2011.

Taking up this portfolio now would mean buying into the notion that the worst is over for the better-run banks. That is not a big reach, and this portfolio has done decently over the longer period. This is definitely worth consideration.


Disclosure: I am long MCD, MMM, WM, CVX, INTC.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.