2 Of Buffett's Biggest Bets In 2012 Look Good Here

Includes: DVA, F, GM, IBM, NOV, T, WFC
by: Bret Jensen

MarketWatch ran a story this weekend profiling the six biggest positions Warren Buffett's Berkshire Hathaway added in 2012. They consisted of Wells Fargo (NYSE:WFC), General Motors (NYSE:GM), DirectTV (NYSE:DTV), Davita Healthcare Partners (NYSE:DVA), National Oilwell Varco (NYSE:NOV) and IBM Corp (NYSE:IBM). DirectTV and Davita were actually picks of Buffett's lieutenants not the Oracle of Omaha, so let's dismiss them from analysis for this piece.

GM looks good from a valuation perspective at about 6.5x 2014's projected earnings and is priced at just 25% of revenue. However, I have trepidation in recommending an investment in an equity that still has so much government involvement and where the UAW plays such a large role as well. I also think its problems and losses in Europe are going to be with it for years if not the rest of the decade. Finally, I think Ford (NYSE:F) is the better pick in the sector and I am already long that auto stock which I recently profiled.

IBM has done a terrific job over the last five years migrating from a hardware vendor to a sales & services provider. However, revenues have been basically flat for five years and the company now is up to 80% of its revenues coming from outside hardware which makes further margin improvement more challenging. The stock is also selling at the top of its five year valuation range based on P/S, P/CF and P/B. At almost 15x forward earnings and yielding under 2%, I see no compelling reason to own the shares at these levels. The two other major investments in Buffett's portfolio look attractive here.

I have been positive on Wells Fargo since July as I outlined in this article. I wrote at the time that the bank was in a better long term position than its brethren (Citigroup (NYSE:C), Bank of America (NYSE:BAC) and JP Morgan (NYSE:JPM)). This was recently confirmed when Wells outperformed its peers in the recently completed stress tests. The stock is up 10% since that piece ran not including dividends. The bank has further upside from here. It stands as the biggest private mortgage originator in the country and is a major beneficiary of the continuing housing market recovery. The stock is at a four year high but sells at just 10x this year's expected earnings. It also yields 2.7% and after the successfully completed stress tests, I would look for payouts to increase considerably over the next couple of years.

National Oilwell Varco is a large oil services firm which has a bright future ahead of it. Its order backlog stood at $11.9B at the end of 2012 significantly above 2011's year end backlog of $10.2B. The 25 analysts that cover NOV have a median price target of $85 a share on the stock, about 25% above its current price of $68. S&P has its highest rating "Strong Buy" and a $95 price target on the shares. Analysts also expect the company to expand revenues at better than a 10% CAGR over the next two years and the stock sports a five year projected PEG of under 1 (.82). The company has an A rated balance sheet and sells at just 10x projected 2014's earnings. Finally, the stock is selling in the bottom third of its valuation range based on P/E, P/S, P/B and P/CF.

Disclosure: I am long BAC, C, JPM, WFC, F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.