Lou Simpson worked with Warren Buffett’s Berkshire Hathaway organization as a money manager for years before leaving Buffett in 2011; the legendary investor has praised Simpson’s investment prowess in his shareholder letters. He now manages SQ Advisors, which reports many of its long equity positions several weeks after the end of each quarter in 13F filings. While the holdings are a few months old, we would think that Simpson tends to make long term investments given his association with Berkshire and so many of his favorite stocks from the end of September are still at the top of his portfolio. Here are his five top picks:
Berkshire Hathaway Inc. (NYSE:BRK.B) was Simpson’s favorite stock, as SQ owned 1.4 million Class B shares and a small number of Class A shares as well. Despite the fact that Berkshire trades at a premium to the book value of its equity, and the fact that many market players are worried that, frankly, Buffett won’t be around forever, Simpson apparently believes that the rest of the team is good enough that the stock is worth buying at this point. Billionaire David Shaw’s D.E. Shaw increased its holdings of Berkshire, reporting 5.9 million shares in its portfolio (see more of D.E. Shaw’s stock picks).
Fiserv, Inc. (NASDAQ:FISV), an $11 billion market cap financial services technology company which process payments and accounts, was another top pick as the fund reported owning 1.7 million shares. In the third quarter of the year, Fiserv’s revenue and earnings were up modestly compared to the same period in 2011, and so while the trailing P/E of 20 might be a fair price we wouldn’t quite call the stock undervalued. Ricky Sandler’s Eminence Capital owned 1.3 million shares of the company (learn more about how Sandler invests and see his recent stock picks).
Simpson also liked TE Connectivity Ltd. (NYSE:TEL), an electronics company whose products are used for transportation, communications, and networking functions. The stock carries a trailing P/E of 15, and net income rose strongly in its most recent fiscal quarter compared to the same period in the previous fiscal year. However, revenue declined 10% and so it would be important to study TE Connectivity more closely to see if it truly is a good value. Greenhaven Associates, managed by Edgar Wachenheim, had the stock as one of its ten largest holdings in its most recent 13F (find more of Wachenheim’s favorite stocks).
See what bank stock Simpson and Buffett both like:
SQ reported a position of 3.4 million shares in home improvement retailer Lowe’s Companies, Inc. (NYSE:LOW). Lowe’s was the third most popular retail stock among hedge funds in our database of 13F filings (see the full top ten list) and we think that this is because of a general perception that the housing market is improving and a trailing P/E multiple of 22. While the valuation is high in terms of historical results, Lowe’s would be a “growth at a reasonable price” stock if a housing recovery drives higher earnings. We’d consider the pricing to be too high for buying at this point; there is plenty of growth already captured in the current valuation.
Buffett’s favorite bank Wells Fargo & Company (NYSE:WFC) rounded out SQ’s top picks as the fund owned 2.8 million shares at the end of September. Wells Fargo wasn’t as popular as some other big banks, but it still made our list of the ten most popular stocks among hedge funds and we think that this was due to its reputation as a high-quality bank and the fact that it is cheap in terms of its earnings. Wells Fargo carries trailing and forward P/Es of 11 and 10, respectively, and its revenue and net income have been improving. Even at a premium to book value we think that it is one of the better buys in the financial sector and certainly safer than some of its peers.
