Warren Buffett And George Soros Bought These Stocks

by: FAF Research

I like to examine hedge funds and what their managers do with their portfolios. After I find several stocks that they share a liking for, I examine the peculiarity of each company in terms of its business and management, plus how it compares to other businesses in the same industry.

It is essential to invest in companies that are superior in metrics in relation to its competitors; I think that reading only the financial reports of a company is not enough to justify an investment. My essential focus point being to invest in companies that are within my circle of competence. I also emphasize on each company's future prospects and management's capability.

Here is a list of stocks that could be interesting as a starting point for further research. I pay lots of attention to stocks that powerful hedge funds buy, because they have a team of analysts that spend the whole day interviewing customers and vendors from each company. Because I am unwilling to commit the time and energy to make tons of calls to individuals who are familiar with each company's businesses, I rely on what each team of analysts selects.

Warren Buffett and George Soros are the best money managers I know, so I settled down to analyze the stocks they bought in the last quarter and present my opinion on them below. I researched their holdings via whalewisdom.com. Previously, I also analyzed Soros' portfolio and Warren Buffett's holdings.

JPMorgan Chase (NYSE:JPM)
My Opinion: SELL

I think that with the yield curve collapsing and banks still generating anywhere from 50%-70% of their revenues from net interest income, Capital markets banks like JPMorgan may have more risk than perceived by their "diversity", given their high concentrations in investment securities as a percentage of earning assets.

I expect the shares and earnings of big money center banks to fall significantly over the balance of 2012 due to a confluence of material events driven by an increasingly troublesome situation in Europe. I think that a Greek exit of the Euro is probable (vs. merely plausible in 2010 and 2011) and I fear material damage in the eurozone will result, both directly and via contagion to other PIIGS countries. The U.S. is also heading towards a mandated deficit reduction cliff and key market-related tax cuts are likely to soon expire. In other words, the macro risks are too high and uncertain to make me comfortable enough to invest in JPMorgan.

I also think that it has become somewhat difficult to analyze the the company, given its huge size. I do not know how analysts can assess the risk contained within the company's significant derivatives book when they have no meaningful access to anything to analyze, and the one thing that made them comfortable with the exposure was the sound risk management behind it (providing benefit of the doubt), which now is fast being questioned.

I pass on this recent purchase of Soros and recommend investors stay on the sidelines with banking stocks.

Chevron (NYSE:CVX)
My Opinion: BUY

Recently, Chevron reported solid earnings. I think that CVX is one of the best energy stocks. CVX reported Q1 earnings of $3.27 per share,$0.05 better than the Capital IQ Consensus Estimate of $3.22, while revenues rose 0.8% year/year to $58.9 bln vs the $72.42 bln consensus. Worldwide net oil-equivalent production was 2.63 mln barrels per day in the first quarter 2012, down from 2.76 mln barrels per day in the 2011 first quarter.

I like the fact that the company's Board of Directors approved an 11.1% increase in the quarterly dividend, to $0.90 per share, payable in June 2012. The company also purchased $1.25 bln of its common stock in the first quarter 2012 under its share repurchase program. I like companies that buy back their own shares and CVX is one of them

Chevron has been generating solid results. For example, 2011 was a record year for Chevron, generating the strongest earnings and cash flow in the company's history. I think the company is well positioned and committed to delivering consistently strong financial and operating performance. Management explained they have a sharp focus on executing major capital projects that will generate 20 percent volume growth over the next six years."

In a recent conference call, Mike Wirth, executive vice president, provided an update on downstream restructuring progress, an essential area inside CVX.

"Improvements in all aspects of our downstream business are ahead of schedule. We are two years into our three-year plan to improve returns, and we already have surpassed our original goal."

Wirth also outlined Chevron's targeted growth opportunities, notably in the petrochemicals and lubricants sectors.

I have a $110 target price, considering a P/E of just 8x, given consensus analysts' 2012 EPS forecasts.

Wells Fargo (NYSE:WFC)
My Opinion: HOLD

As I explained above, given the current macroeconomic environment and relatively decent valuations for bank stocks, I am taking a conservative outlook on the banking industry and feel there will be better buying opportunities later this year. I, at this moment, will not buy bank stocks whose earnings are sensitive to falling asset yields and lack significant contribution from fee-based businesses.

While I am avoiding investing in the banking sector, I think that Wells Fargo is the best stock in that Industry.

Recently, Compass Point research raised its WFC target to $39 from $37, reflecting a lower risk premium, as negative headlines from mortgage servicing issues appear to be largely behind the industry and credit performance continues to improve. Compass is increasing its FY12 EPS slightly above consensus, driven by a better mortgage banking environment. In overall, Compass analyst remain positive on WFC as its actions in the current environment are likely to drive long-term wallet share gains and lead to multiple channels of additional revenues.

Wells Fargo's ongoing focus on producing high risk-adjusted returns helps it maintain strong capital ratios. Its absolute and relative liquidity positions it above its peers, and helps it to take advantage of
the opportunities arising from the volatile market environment. The company also remains committed to inspiring investors confidence through capital deployment activities such as dividend increases and share buybacks. I like to pick companies that both buy back their own stocks and deliver solid dividends every year.

Notably, in March 2012, Wells Fargo passed the stress test of the Federal Reserve comfortably. The company also enhanced its shareholder wealth by almost doubling its dividend. Also, its capital plan includes an increase in share repurchase activity in 2012, compared with the prior year.

If I were to select a bank, I would go with Wells Fargo.

International Business Machines (NYSE:IBM)
My Opinion: BUY

I like Warren Buffett's IBM pick. Some weeks ago, Barclays issued a very interesting report, where it explained that IBM should trade more like an Industrial stock, commanding higher multiples. Barclays believes IBM has started a trend, leading the 'industrialization' of large cap technology. Being an "industrial stock" is something many tech companies would like to be - the industrial sector boasts PEs in the 16.5x range on average vs. their IT Hardware sector, which averages about 10x excluding IBM. Barclays' analyst explained that IBM has essentially taken on more characteristics of industrial stocks, culminating in Buffett's purchase of a 5.5% stake last year.

Recently, IBM management confirmed a quarterly dividend increase to $0.85/share from $0.75/share. The board today also authorized $7 billion in additional funds for use in the company's stock repurchase program. This amount is in addition to ~$5.7 bln remaining at the end of March from a prior authorization. I like companies that deliver both share buybacks and dividend increases.

In its last earnings report, IBM reported strong numbers and guidance.IBM reported Q1 earnings of $2.78 per share,$0.15 better than the Capital IQ Consensus Estimate of $2.63 while revenues rose 0.4% year/year to $24.7 bln vs the $24.81 bln consensus. The most important part was the upside guidance that management gave for FY12, forecasting EPS of at least $15.00 vs. $14.90 Capital IQ Consensus Estimate, while prior guidance was for "at least $14.85".

Management highlighted:

"In the first quarter, we drove strong profit and earnings per share growth. We delivered another excellent software performance, expanded services margins, and continued the momentum in our growth initiatives... Our investments in growth market countries continued to generate strong revenue growth across software, hardware and services while contributing to the company's ongoing margin expansion."

I think that IBM management displayed remarkable execution having posted another quarter of double-digit EPS growth with minimal y/y revenue growth due to better mix and share repurchases (e.g., software up ~6%, hardware down ~(7)%, ~$3bil of buybacks, etc.). I consider IBM still has levers to pull (for example, infrastructure take-out, revenue optimization, etc.) to maintain 10%+ EPS growth.

General Motors (NYSE:GM)
My Opinion: BUY

In the past week, General Motors' shares were very volatile because GM announced a plan to eliminate pension obligations. Basically, GM will be providing Prudential with assets worth 110% of the G.AAP pension obligation. GM is spending $3 bln to transfer these obligations. To justify this transaction, the discount to GM's valuation associated with pension risk would need to be greater than $3 bln (9% of market cap). I do not believe this is the case.

UBS analyzed this in a recent report and it did not like the particular GM's announcement. Firstly, UBS says the transaction is too small, and post-transaction, GM's PBO obligation would still be larger than any company within the S&P 500. Secondly, it believes funding pensions would more adequately address pension risk. Lastly, it sees surprisingly little correlation between PE valuations and pension exposure.

I think that some Pros analyze GM and think the stock is cheap. Currently, shares of General Motors are trading at just 6X projected 2012 EPS estimate of $3.53. The company's current trailing 12-month earnings multiple is 5.5x, compared with the 11.0x average for the peer group and 14.0 for the S&P 500. Over the last five years, shares have traded in a range of 5.0x to 10.3x trailing 12- month earnings. There is room for appreciation here.

I like Buffet's pick. I think GM is a buy because shares are super cheap. In the last earnings report, GM generated solid results. GM reported $0.08 better than the Capital IQ Consensus Estimate of $0.85, while revenues rose 4% year/year to $37.8 bln vs the $37.51 bln consensus. Management expressed confidence in the business:

"The U.S. economic recovery, record demand for GM vehicles in China and the global growth of the Chevrolet brand helped deliver solid earnings for General Motors. New products are starting to make a difference in South America, but Europe remains a work in progress. We'll continue to work on both revenue and cost opportunities until we have brought GM to competitive levels of profitability."

With the strengthening U.S. economy helping release pent-up demand,GM now expects that full-year 2012 U.S. light vehicle sales will be in the 14.0-14.5 million range. Previously, the company expected sales to fall between 13.5-14.0 million units. Based on the company's current outlook, GMNA's results for the second and third quarters of 2012 are expected to be comparable to the first quarter of 2012 due to the scheduled downtime at factories that produce full-size trucks.

I think that the current European problems are priced into the stock. The world's largest automaker has lost money in Europe for the last 12 years. But management also expressed confidence it will turn the business around: "I think it'll be a good year or two before we can achieve profitability in Europe again," CEO Akerson said at an on-stage interview in San Francisco last month.

European sales had been recovering before the continent became gripped by fears of debt defaults in the middle of last year, Akerson said at the Commonwealth Club of California, a non-profit public affairs forum. "People stopped buying. I can see it every day in the sales reports," said Akerson, who was born in California and studied at the London School of Economics.

Industry-wide, Akerson believed there were between seven and 10 excess car plants in Europe and other executives estimate there is 20 percent over-capacity there.

Other stocks Soros bought

Soros also bought Capital One Financial (NYSE:COF) and Finisar (NASDAQ:FNSR) in the last quarter. Stifel Research added COF to the Stifel Select List as a top pick in consumer finance. Its view is that COF's shares remain significantly undervalued relative to bank peers, but it believes this discount is poised to close. In 2013, Stifel expect COF to adopt a more shareholder- friendly capital strategy that should further close the valuation gap. The company believes that the recent market turmoil has created a compelling entry point into a strategic transformation that has significant upside potential. I think COF is an interesting pick to follow.

Finisar is a provider of fiber optic subsystems and network test and monitoring systems that enable high-speed data communications over local area networks, or LANs, storage area networks, or SANs, and metropolitan access networks, or MANs. It is focused on the application of digital fiber optics to provide a line of high-performance, reliable, value-added optical subsystems for data networking and storage equipment manufacturers.

I do not like this type of business because it is extremely hard to understand. Last week, MKM Partners initiated FNSR with a Buy and price target of $24 saying it believes that revenue growth should return to the low double-digits by 1QFY13 (July 2012). Gross margins have also been disappointing over the past year, but should expand in FY13 on better volumes and product mix.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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