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In a recent ranking of the performance of public stocks held by Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), several of his largest holdings recorded negative gains since June 30, 2012. Coca Cola (NYSE:KO) (representing 19.63% of the portfolio using June 30 positions and October 31 closing prices) has dropped by -4.25%, while American Express (NYSE:AXP) (11.2%) has dropped by -3.18% and International Business Machines (NYSE:IBM) (17.11%) has dropped by -0.11%. Meanwhile, another major component, Wells Fargo (NYSE:WFC) (18.28%) is up a mere 1.41%.

Despite such lackluster performance by major holdings representing over 66% of Mr. Buffett's portfolio, the entire portfolio as represented by the June 30, 2012 filing of SEC form 13-F would actually by up by about 1.95% since June 30, 2012 as of October 31, 2012 (excluding effects of portfolio composition changes since June 30, as well as any holdings not reported in 13-F).

This is primarily driven by stellar performance by some of Buffett's smaller holdings such as Phillips 66 (NYSE:PSX) (1.69%), up 43.43% since June 30, USG Corp (NYSE:USG) (0.6%), up 40.16%, Moody's Corp (NYSE:MCO) (1.8%) up 32.31% and General Motors Co. (NYSE:GM) (0.34%) up 29.31%. In addition, performance was enhanced by good performance by the larger holdings of Procter & Gamble (NYSE:PG) (5.45%), up 14.96%, as well as Kraft Foods (NASDAQ:MDLZ)(NASDAQ:KRFT) (3.24%) up 8.76% and Walmart (NYSE:WMT) (4.62%) up 8.19%.

Is it time to get on board and buy some of Mr. Buffett's lagging major holdings of Coca-Cola, American Express, and IBM? If such shares provide a solid performance into year-end, while current top performing stocks retain their recent gains, Berkshire Hathaway could substantially improve its current performance.

The Coca-Cola Company

Although Coca-Cola shares have dropped by 4.25% since June 30, 2012, they remain up 8.52% since the beginning of the year. It is also interesting to note that from a cyclical perspective, Coca-Cola have generally performed well during the last two months of the year. During the past 5 years, during the months of November and December, Coca-Cola shares have increased on 4 occasions by an average of 5.27%. Meanwhile, they decreased in 2007 by only -0.11%.

Coca-Cola Stock Performance From October 31 to December 31

Year

Stock Price on Oct. 31

Stock Price on Dec. 31% change
201133.2134.26+3.16%
201028.9831.30+8.01%
200924.4226.30+7.70%
200819.7420.18+2.23%
200726.6226.59-0.11%

Analysts' earnings estimates for Coca-Cola currently stand at $2/share for the year ending December 2012 and $2.19/share for the year ending 2013. This yields P/E ratios of 18.60 and 17 respectively, while Coca-Cola's dividend of $1.02/share implies a dividend yield of 2.8%. Although valuations seem fair for Coca-Cola, an improvement in the GDP growth rates for the U.S. and Europe, driven by accommodative central bank policies, could give further boost to future earnings. Hence, positive cyclical factors, fair valuations, and potential improvement in the economic environment could indeed provide a boost to Coca-Cola shares.

American Express

Even though American Express shares have dropped -3.18 since June, they are still up 20.34% year-to-date. However, from a cyclical perspective, American Express has not performed well during the last two months of the year for the past five years (although past performance is no indication of future performance). During the past 5 years, during the months of November and December, American Express shares have increased on 2 occasions by an average of 9.91%. Meanwhile, they decreased on three occasions by an average of 18%. Given the financial markets turmoil of 2007 and 2008, such result is not surprising.

American Express Stock Performance From October 31 to December 31

Year

Stock Price on Oct. 31

Stock Price on Dec. 31% change
201149.9146.51-6.81%
201040.2441.65+3.5%
200933.2138.63+16.32%
200825.3217.08-32.54%
200755.1947.10-14.66

Analysts' earnings estimates for American Express currently stand at $4.36/share for the year ending December 2012 and $4.73/share for the year ending 2013. This yields P/E ratios of 12.80 and 11.8 respectively, while American Express' dividend of $0.80/share implies a dividend yield of 1.4%. Such valuation is attractive as we do not believe that the events of 2007 and 2008 will repeat themselves. However, given the solid appreciation in excess of 20%year-to-date for American Express, coupled with generally negative cyclical factors during the past five years for the upcoming two months, further upside for American Express could be limited for November and December.

International Business Machines

As in the case for Coca-Cola and American Express, although IBM shares have dropped by -0.11% since end of June, they are actually up for the year by 7.1%. From a cyclical perspective, during the past five years, IBM shares were very much unchanged during the last two months of the year during 2011, while they increased on 2 occasions in 2010 and 2009 by an average of 5.84%, and decreased on the other 2 occasions of 2008 and 2007 by an average of -7.77.

In an earlier article we published on October 30, 2012 "will these 5 tech stocks rally into January?", when examining IBM performance from a longer term perspective for the past 10 years, it had actually appreciated in 6 out of the last 10 years during the three months of November, December and January.

IBM Stock Performance From October 31 to December 31

Year

Stock Price on Oct. 31

Stock Price on Dec. 31% change
2011181.64181.63unch
2010138.86142.55+2.66%
2009114.44124.76+9.02%
200886.3978.64-8.97%
2007106.2699.27-6.58%

Analysts' earnings estimates for IBM currently stand at $15.13/share for the year ending December 2012 and $16.64/share for the year ending 2013. This yields P/E ratios of 12.9 and 11.7 respectively, while IBM's dividend of $3.40/share implies a dividend yield of 1.80%. Such valuation is attractive for IBM, while from a cyclical perspective, as we do not believe there will be a repeat of the events of 2007 and 2008, there is a good likelihood for IBM shares to appreciate during the next two months.

Conclusion

IBM, Coca-Cola and American Express have been acting as a drag on the performance of Warren Buffett's Berkshire Hathaway since the end of June. On the other hand, such stocks are still performing quite well since the start of the year, and in the case of IBM and Coca Cola, there is a good likelihood of further appreciation during the next two months. Naturally, we are making such conclusion assuming Buffett has maintained such positions in his portfolio during the past three months, a fair assumption given Buffett's typical buy and hold strategy (although there had been some exceptions in the past as in the case of Intel (NASDAQ:INTC)).

Source: Warren Buffett's Largest Holdings Underperforming; Is It Time To Buy?