Several weeks after the end of each quarter, hedge funds and other major investors such as Warren Buffett’s Berkshire Hathaway file 13Fs with the SEC, disclosing many of their long equity positions as of the end of that quarter; check out Berkshire’s most recent 13F on the SEC’s website. Our database tracks hundreds of 13F filings, with us using the included information to develop investing strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year).
We can also look at mangers’ favorite picks in a number of areas, including stocks satisfying the traditional value criteria of low earnings multiples. Here are Berkshire’s five largest positions in stocks which currently post both trailing and forward P/Es of 12 or lower; see Buffett’s stock picks over time:
Leading the list is the holding company’s largest position in terms of market value, Wells Fargo & Co (NYSE:WFC). Buffett was buying the bank between January and March, closing the quarter with about 460 million shares in his portfolio. While many other megabanks are currently valued at their book value or lower, Wells Fargo’s P/B ratio is 1.4. While it’s tough to call the stock a good value in that sense, in earnings terms things look better with a trailing P/E of 12. In addition, Wells Fargo managed 22% earnings growth last quarter compared to the first quarter of 2012 (though revenue was essentially unchanged), and one underrated benefit of the company is that its close proximity to Buffett may give it a leg up in future Berkshire financing activities.
Buffett and his team disclosed ownership of over 50 million shares of US Bancorp (NYSE:USB). The $65 billion market cap bank joins Wells Fargo & Co (NYSE:WFC) as being fairly cheap in absolute terms, at a valuation of 12 times its trailing earnings, though recent financial performance has been fairly static here. Wall Street analysts aren’t expecting much of an improvement in US Bancorp’s earnings per share over the next several quarters either, judging from the fact that the forward P/E is only slightly lower at 11.
We’re not sure that it’s such a good buy compared to other financial stocks, such as Citigroup Inc. (NYSE:C), for example, which has better growth options internationally. Still, it’s difficult to ignore Buffett’s bullishness.
The best of the rest
Over the last year or so, Berkshire has been a significant buyer of oil- and gas-refining spinoff Phillips 66 (NYSE:PSX) and owned more than 27 million shares per the 13F. Downstream energy companies are particularly cheap under current market conditions, at least in terms of their financials, and Phillips 66 is no exception as both the trailing and forward P/E multiples come in at 9. Sell-side consensus in terms of earnings growth implies a five-year PEG ratio of 0.8, even after the stock has more than doubled in price in the last year. We think Phillips 66 is an interesting target for further research, and as most post-split companies, the potential for market-outperformance exists up to 36 months after the spinoff.
The company’s former parent, ConocoPhillips (NYSE:COP), is another of Buffett’s cheap stock picks. The oil and gas company posts an earnings multiple of 11, whether we consider trailing numbers or forecasts for 2014. ConocoPhillips also looks like it could make for an interesting income stock, with recent quarterly dividend payments of 66 cents per share resulting in a yield of over 4%, though of course investors would have to deal with commodity price risks. It could be a good value prospect, though we’d note that peers such as BP or Exxon Mobil also offer low multiples, high yields, or both.
Berkshire Hathaway maintained a stake of 25 million shares in General Motors Company (NYSE:GM) during the first quarter of 2013. Automakers are popular value stocks, and Buffett seems to like GM in particular. Analysts also like the stock: the forward earnings multiple is 8 (incorporating expectations of significant increases in EPS) and the five-year PEG ratio is 0.6. We do think that auto related stocks are at least possible value plays, but in the case of General Motors we’d be somewhat concerned by the fact that revenue and net income both fell in Q1 2013 versus a year earlier.