In mid February, Warren Buffett’s Berkshire Hathaway filed its 13F with the SEC, disclosing many of its long equity positions as of the end of December 2012. This information is a bit old, but we have found that even with the delay in 13F filings the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy) and of course Buffett is a long term investor so Berkshire likely still owns most of these stocks. The PEG ratio combines the P/E multiple and analyst expectations for earnings growth in a single quantitative metric, and so can be one way to measure a stock’s upside potential if the analysts turn out to be correct. Here are five stocks which Berkshire owned at the end of December with five-year PEG ratios less than 1 (or see the full list of stocks Buffett reported owning):
During the fourth quarter of 2012 Berkshire increased its holdings of DirecTV (NASDAQ:DTV) by 15% to a total of over 34 million shares; this represented over $1.7 billion invested in the company at that time. DirecTV’s earnings grew strongly in the fourth quarter of 2012 versus a year earlier, and while revenue growth was more limited the stock is fairly cheap at 13 times trailing earnings. Analyst expectations imply a five-year PEG of 0.7. Billionaire Mario Gabelli’s GAMCO Investors was another major shareholder of DirecTV, reporting a position of 4.8 million shares (research more stocks Gabelli likes).
Buffett and his team kept their holdings of Philips 66 (NYSE:PSX), a $43 billion market cap downstream oil and gas company recently spun out from ConocoPhillips (NYSE:COP) constant between October and December. Many value investors like investing in spinouts because management of the new company may be better able to focus on operations without having to concern themselves with the needs of the larger organization (read more about investing in spinouts). Currently Phillips 66 trades at 11 times trailing earnings and 10 times analyst consensus for 2014, though reported financials have been down.
Read on for three more stocks Buffett likes: