Warren Buffett is widely regarded as the greatest investor of all time. With the recent announcement that Buffett is backing up the truck on his own stock, now may be a perfect time to buy some Berkshire Hathaway (NYSE:BRK.A) and some Coca-Cola (NYSE:KO), given that both of these names have proven to be sturdier than the overall stock market over the past thirty years. Management at Berkshire will continue to be second to none, in our view, even when Buffett eventually steps down, although we can't see him leaving Berkshire anytime soon.
Berkshire Hathaway has been one of the very best long-term investments in the history of the stock market. Warren Buffett has consistently outperformed the equity, bond, hedge fund, and private equity markets for the past 50 years, and I expect the man to outperform the markets for the next twenty years, as many seniors are living longer and longer thanks to advances in medicine. While it's getting to the point that the health effects of drinking Coca-Cola matter to his investors more than the share price of Coca-Cola (given that Buffett is believed to drink several of the beverages per day) even though Coke is Berkshire's biggest holding, it is good to see that Buffett is turning toward some of the best and brightest in the value and hedge fund investment space to guide the company after his departure.
Berkshire is trading below book, the markets are down, and I applaud the announcement of the authorized share buyback. If the stock trades under $100K per share, I believe that Buffett will be in the market buying with both fists. Hopefully Buffett will continue enjoying his job the way he does today for many years into the future as his passion for investing is what has driven the shares of Berkshire's stock over the long term.
While the overall markets may fall a bit further before finding intrinsic value (my view is that $950 is a fair price for the S&P, given the macro environment), I feel Berkshire is a great buy if it trades for less than $100K per share at any point in the future. One way longer-term investors who are incredibly risk-averse and have a 401(k) can play the name is to buy deep in the money leap calls on the B shares. A deep in the money call position will mitigate some risk while preserving the upside from the appreciation of Berkshire stock. The opportunity cost is low, since Buffett won't be paying dividends in the near future in all likelihood. While Berkshire does not pay a dividend right now, investors can always sell an at-the-money front month call option against their stock to earn a nice yield on their position -- this calendar spread strategy is somewhat market-neutral while profiting from the time decay of the current month option contract.
Coke's stock has not dropped with the swoon in the Russell or the S&P 500, but the shares are still reasonably priced and have not run up the way McDonald's (NYSE:MCD) has (it was a previous favorite of ours). While we think MCD could continue its run, I feel that Coke is a smart derivative play on the Golden Arches' growth rate. Coke is trading for 15X earnings, which is a multiple that looks too low to me, considering the company's long-term track record for rewarding shareholders.
Coke is truly a "buy and forget" investment that investors can own for decades upon decades in bull or bear markets. While Coke is Buffett's largest position, I think owning Coke and Berkshire at the same time is a rock solid foundation for any portfolio over a ten-year period. Because Coke pays a nearly 3% dividend, the deep in-the-money leap call strategy is not as interesting for 401K investors who don't have to worry about short- versus long-term capital gains rates. A covered call approach in Coke, however, makes a good deal of sense for those with a low tolerance for short-term volatility.
While we have covered ConocoPhillips (NYSE:COP) in depth for some time now at Hedgephone, Chevron (NYSE:CVX) is an equally attractive name in the oil and gas space which pays a tempting dividend at current prices. CVX did not take a large bath via write-downs and losses in 2008, the way that Conoco did, which should give Ben Graham investors less anxiety over the long term. Graham often wrote about avoiding stocks in businesses which have lost money over the past few years, unless the shares could be purchased below net current assets. Chevron trades for around 8.5X forward earnings, but investors have to watch the price of oil a bit, as the margin of safety will rise and fall with the volatile price of Texas Tea.
While Johnson & Johnson (NYSE:JNJ) shares have not budged much over the past year, investors have earned a nice dividend yield over that time period, and covered-call investors have benefited from selling option premium on this stalwart name trading at 15X earnings. While the recall issues are still front and center, JNJ has a wide moat and a nice margin of safety from a product standpoint, given that it sells staples and healthcare-related items. Healthcare spending is one of the only areas of the economy that should be immune to a recession or even a depression-like environment if Europe gets even worse or if we see a sovereign debt-fueled collapse in global trade. I am not calling for that, and I feel the bottom for the stock market could be forming at $1,100. That said, a close eye should be kept on the recall issues as many investors have learned the hard way to avoid companies that run afoul of the law when suffering the slings and arrows of outrageous fortune.
Disclosure: I am long JNJ.
Additional disclosure: I advise on portfolios holding CVX, JNJ and Berkshire