Warren Buffett'S Q1 Stock Picks

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Includes: AAPL, AXP, BAC, C, GOOG, IBM, KO, MA, PG, V, WFC
by: Insider Monkey

By Guan Wang

Warren Buffett is a legend in the investment management industry. If one had invested $1000 with Buffett back in the day, one would have become a millionaire today. However, the recent performance of this 81-year-old man is not as stunning as before. Buffett currently has an estimated net worth of ~$45 billion, down from $50 billion a year ago, mainly due to the loss in Berkshire Hathaway (NYSE:BRK.B) stock. Despite that, Buffett is still ranked the 3rd on the Forbes World Billionaires list and his investments catch the eyes of both ordinary investors and seasoned money managers alike.

Recently, Buffett released the latest holdings of Berkshire Hathaway in a 13F filing. Let's take a closer look at his most bullish bets.

The largest positions in Buffett's portfolio did not change much over the first quarter. The top five positions are still Coca-Cola Co (NYSE:KO), Wells Fargo & Co (NYSE:WFC), International Business Machines (NYSE:IBM), American Express Co (NYSE:AXP), and Procter & Gamble Co (NYSE:PG). Amongst these five positions, Buffett increased his bets on Wells Fargo and IBM.

Warren Buffett boosted his stake in Wells Fargo by 3% during the first quarter. At the end of March, Berkshire Hathaway had $13.5 billion invested in this stock. Wells Fargo is also one of the most popular financial stocks amongst the hedge funds we track. Sixty-eight hedge funds reported owning Wells Fargo in their 13F portfolios at the end of 2011. Buffett is the most bullish money manager about Wells Fargo, followed by Tom Russo, Ken Fisher, Ric Dillon, Lee Ainslie, Bill Miller, Wallace Weitz, and John Paulson (check out John Paulson's top stock picks).

Wells Fargo is currently trading at around 11X its 2011 earnings. It is expected to earn $3.27 per share in 2012 and $3.67 per share in 2013, making its 2012 P/E ratio 9.9 and its 2013 P/E ratio about 8.8. The number looks attractive compared with the overall market, but some of its peers have lower multiples. For example, Citigroup Inc (NYSE:C) has a 2013 P/E ratio of 5.9 while Bank of America Corp (NYSE:BAC)'s 2013 P/E ratio is 6.8. But, valuation is not the only factor for Buffett when picking financial stocks. Instead of shopping for a low price, he prefers fairly-priced companies with strong management.

Over the past year, Wells Fargo experienced both strong loan growth and improvements in credit quality. In the first quarter of 2012, the company reported net income of $4.2 billion and earnings of $0.75 per share, beating the analyst consensus of $0.73 per share. It originated $129 billion worth of mortgage loans, up 8% from the same quarter a year ago. Revenues generated from mortgage totaled $2.9 billion, up 21% from the same quarter last year. Credit quality and capital ratios also improved. Its Tier 1 common equity ratio was up 49bps to 9.95% on a quarter-to-quarter basis.

Buffett also increased his stakes in IBM by 1% during the first quarter. Berkshire Hathaway had $13.4 billion invested in this stock at the end of March. IBM was also quite popular amongst hedge funds. There were 37 hedge funds with IBM positions in their 13F portfolios at the end of 2011. Ric Dillon's Diamond Hill Capital had $158 million invested in IBM at the end of last year. Bill Miller and Louis Navellier are also bullish about IBM (check out Louis Navellier's top stock picks).

Buffett added IBM to his portfolio during the third quarter last year. It surprised a certain number of his followers, as Buffett rarely purchases technology stocks. He tends to invest in companies with relatively simple businesses rather than companies with complicated technologies. Hedge funds are more bullish about Apple Inc. (NASDAQ:AAPL) and Google Inc. (NASDAQ:GOOG) compared to IBM, but Buffett thinks IBM is more suitable for Berkshire. In a recent annual meeting, Buffett said he would not buy Apple or Google even though he would not be surprised to see these stocks making great profits in the next decade.

According to Buffett, IBM "will not have the wild swings that we've seen throughout history" - and, after reading IBM's annual report every year for 50 years, Buffett does not think "there is any company that I can think of, big company, that's done a better job of laying out where they are going to go and then having gone there". We like IBM too. The company is a great innovator. The company's R&D expense is usually 6% of its revenue, and it seems to have paid off. IBM has been awarded more patents than any other company every year over the past 19 years. It has also been adding new products through acquisitions.

Buffett did not increase or decrease his stakes in Coca-Cola or American Express. He slightly reduced his position in P&G by 5%. We like P&G as a dividend play. Its dividend yield is 3.53% and its payout ratio is only 64%. The company has been raising its dividend payments for 55 consecutive years and we expect it will continue increasing dividends in the future. Coca-Cola is also a dividend growth play. It has a decent dividend yield of 2.66% and its pays out about 50% of its earnings. Plus, Coca-Cola has also been raising its dividends for about 50 consecutive years. American Express also pays dividends. It recently announced that it would increase its annual dividend by 11%. The stock is trading at 12X its 2013 earnings, versus 16.7 for Visa Inc (NYSE:V) and 15.6 for MasterCard Inc (NYSE:MA).

Disclosure: I am long C.

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