4 Dirt Cheap Stocks That Warren Buffett Owns

by: NakedValue

Warren Buffett has warned that Berkshire Hathaway's (NYSE:BRK.A) increasing size would be an impediment to future returns because it limits his world of investable securities. But despite these concerns, Buffett continues to find inexpensive stocks right from under the noses of other investors. On March 14, 2011, Berkshire reached an agreement to acquire Lubrizol Corporation. The most surprising thing about the deal may have been that the $9 billion purchase had a dirt cheap price/earnings ratio despite above average returns on equity.

Investors may be surprised to learn that despite Buffett's constraints, Lubrizol is not the only dirt cheap stock in Berkshire Hathaway's portfolio. Here are dirt cheap Berkshire Hathaway stocks that investors should consider.

Forward P/E: 6.08
Price/Book: 6.17
Price/Sales: 0.64
ROA (ttm): 9.46%

The international publishing and broadcasting company owns 83 U.S. daily newspapers including USA Today, which has a 1.817 million daily circulation. Among its chief stand alone digital assets is CareerBuilder, an employment website. The company also operates 23 television stations and owns Captivate Network, a video advertising business featured in lobbies and hotels.

The company's publishing segment is in decline because of reduced circulation, but the company has offset much of this gain with strength from other areas. Between 2009 and 2010, publishing revenues decreased 6%, Digital revenues increased 5% and broadcast revenues increased 22%. And even though the publishing revenues declined, the rate of decline could be slowing as 2009 revenues had dropped 23% from 2008 levels. Central to the company's success will be its ability to increase sales in strong segments and reduce expenses at the same that shrinking businesses decline. As publishing revenues declined, GCI cut the segment's operating expenses by 70% between 2008 to 2009 and 10% between 2009 to 2010.

While the company is a strong cash flow generator, the company's $2.35 billion in long term debt is a concern when 75% of the company's revenues come from publishing. In addition, the company's pension is underfunded by $346 million.

The fact that the company did not repurchase shares in 2010 despite having around $809 million of capacity left under its stock buyback program, along with the company's cheap valuation, illustrates the urgency with which management wants to pay down debt.

In addition to Berkshire's ownership, Chicago value investing shop Ariel Investments is also a shareholder. Besides the strong secular headwinds working against the newspaper industry, this company also faces tough comparisons in this current year without the benefit of $107 million from political and Olympic advertising. Going forward, brave investors may consider this an interesting opportunity. Considering the stock's strong move from March 2009 lows and the publishing industry's certainly uncertain future, even Gannett bulls should wait for stock price weakness.

Trailing P/E: 10.54
Forward P/E: 8.71
Price/Book: 1.30
Price/Sales: 1.53
ROA (ttm): 3.32%

The insurance provider specializes in life insurance and supplemental health plans as well as annuities, juvenile and senior life coverage as well as limited-benefit products. The company generates half of its revenues from its life insurance business. Between 2006 and 2010, revenues grew from $1.448 billion to $1.663 billion. Health insurance contributed around 30% of total revenues. Between 2006 and 2010, the segment's revenues declined from $1.237 billion to $987.4 million.

The company faces some issues with regulatory uncertainty related to Health Care Reform Legislation. Other insurers with similar risk exposures have traded at much more distressed levels like CNO Financial Group (NYSE:CNO), which we listed as one of John Paulson's 7 Hidden Gems. CNO trades at a price/book ratio of 0.43 and a forward P/E of 9.24.

Forward P/E: 14.05
Price/Book: 25.97
Price/Sales: 0.75
ROA (ttm): 6.94%

The company operates as a diversified media and education company. The media segment operates under the Washington Post brand and it also has six television stations in Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville. The education segment operates under the Kaplan brand. The company provides educational services, training, standardized test preparation and other services.

Washington Post has long been one of the most defining positions in Berkshire Hathaway's stock portfolio. But in recent decades, the company's economic importance has declined because of the limited growth opportunities in its core business. The Washington Post has many of the same challenges as Gannett, but headwinds can also be found in its once high-flying education business.

Kaplan has buoyed Washington Post as the namesake business floundered. Between 2008 and 2010, Kaplan's total revenues grew from $2.33 billion to $2.90 billion. While Kaplan test preparation declined, Kaplan Higher Education revenues soared, increasing from $1.16 billion to $1.79 billion. This growth could be in jeopardy as for-profit universities come under higher governmental scrutiny. In 2010, Title IV Federal Education funds accounted for 82% of Kaplan Higher Education's revenues. With Kaplan Inc. contributing 64% of Washington Post's revenues, this could be a major headwind going forward.

Washington Post is an intriguing stock, but investors should realize that the stock may not be as cheap as it looks. Much of an investor's opinion of the stock should reflect their opinion of Kaplan and its future direction. If investors are bullish on Kaplan, Washington Post could be a steal at these levels.

Forward P/E: 12.00
Price/Book: 10.97
Price/Sales: 0.44
ROA (ttm): 9.09%

The global retail behemoth operates under various store and business designs. It is most famous for its iconic, large format, big box retail stores with a wide variety of low cost merchandise. More recently, it has included fresh fruit in its big box stores. Grocery accounts for 54% of total sales. Wal-Mart is also developing a new format of smaller "express" stores. The company also owns wholesaler Sams Club. Wal-Mart operated 708 discount stores (avg 106,000 sqft), 2,907 supercenters (avg 184,000 sqft) and 596 Sams Clubs in the U.S.

The growth opportunities are intriguing. As of January 31, 2011, Wal-Mart International had 4,557 stores. China had 328 stores, Brazil had 479 stores and India had 5 stores. China and India have populations that are about 4x the U.S. population. These regions should continue to provide rich opportunities as the per capita GDP increases and Wal-Mart's brand name develops in each country.

While the market has reasonable concerns about retailers because of dual headwinds of rising energy prices, falling consumer spending and rising input costs that are pressuring margins, Wal-Mart's brand name and valuation make it a cheap company.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TMK, GCI, WMT, BRK.B over the next 72 hours.

Additional disclosure: I own CNO

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