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Media General Inc (MEG), NOW Inc (DNOW), and Lee Enterprises, Incorporated (LEE): Should You Immitate Warren Buffett’s Small-Cap Picks?

Warren Buffett has a great investment acumen and people watch closely every publicly disclosed investment that Berkshire Hathaway make and listen to every word the “Wizard of Omaha” says. However, Berkshire’s equity portfolio, valued at around $110 billion, is primarily invested in large and mega-cap stocks, such as Wells Fargo & Co (NYSE:WFC), The Coca-Cola Co (NYSE:KO), and American Express Company (NYSE:AXP) (which make the fund’s top three equity positions). Mr. Buffett focuses on long-term horizon while picking stocks, and while this strategy works fine for Berkshire’s huge equity portfolio, smaller investors won’t be able to beat the market by immitating Mr. Buffett’s large cap picks. Our research showed that a portfolio that consists of 50 most popular stocks among big investors (which are mostly large-cap stocks) underperformed the market by 7.0 basis points per month between 1999 and 2012. However, following the positions of these investors can provide some insights that could help beat the market. The key is to focus on their small-cap picks, as our findings also showed that 15 most popular small-cap stocks outperformed the market by 1.0 percentage point per month. Moreover, our strategy returned 132% between August 2012 and March 2012 and outperformed the S&P 500 ETF (SPY) by over 79 percentage points.

Warren Buffett and Billionaires

Mr. Buffett also holds some less significant positions in small cap and mid-cap companies. Berkshire’s latest 13F filing revealed three long stakes in companies with market capitalization under $2.5 billion, which are Media General Inc (NYSE:MEG)NOW Inc (NYSE:DNOW), and Lee Enterprises, Incorporated (NYSE:LEE).

In Media General Inc (NYSE:MEG), Berkshire holds 4.65 million class A shares with an aggregate value of $77.73 billion. The stake amasses 0.07% of the equity portfolio and ranks as 41th largest in terms of value. Media General is a $2.2 billion provider of news, information, and entertainment through several affiliated television stations, as well as digital media and mobile platforms. Mr. Buffett added the company to his equity portfolio during the third quarter of 2012 and since the then the stake remained unchanged, but the value of the position more than trippled from the initial $24.07 million. Mr. Buffett also played a major role in Media General Inc (NYSE:MEG)’s fate back in 2012 when the company was on the edge of collapse. He bought the publishing arm for $142 million and loaned $400 million to pay bank debt and provided a credit line of $45 million. In the following years, Media General Inc (NYSE:MEG) recovered strongly as its 2014 revenue amounted to $675, up from $210 million in 2013 and close to the same level as in 2010-2011. The company also turned to profit in 2013 after several years of losses and at the end of 2014 its annual EPS amounted to $0.59 per share, versus $0.10 per share in the previous year and significantly higher than a loss of $8.15 posted in 2012. Another investor bullish on Media General is Mario Gabelli of GAMCO Investors, which owns 5.97 million shares as of the end of 2014.

On the other hand, NOW Inc (NYSE:DNOW) represents a relatively new position in Berkshire’s portfolio. The investor initiated a stake during the second quarter of 2014 and owns 1.83 million shares, unchanged since then. However, so far it seems like the investor is losing money from this position, since the value dropped to $46.97 million at the end of 2014, from $66.10 million disclosed as of the end of June. NOW is a small-cap company engaged in services and solutions for the midstream and downstream energy and industrial sectors. It went public at the end of May, 2014 after it was spun-off from National-Oilwell Varco, Inc. (NYSE:NOV). Even though the value of Berkshire’s stake declined, the investor did not purchase the shares but received them after the spin-off. Berkshire holds 5.26 million shares of National-Oilwell Varco as of the end of 2014, the stake was significantly reduced from 8.80 million shares the fund held at the end of March, 2014. Another shareholder of NOW Inc (NYSE:DNOW) is William B. Gray’s Orbis Investment Management, which owns 10.69 million shares, according to its latest 13F filing.

Lee Enterprises, Incorporated (NYSE:LEE) is the smallest company in Berkshire Hathaway’s equity portfolio, sporting a market cap of $162 million. Mr. Buffett owns 88,900 shares of the company, valued at $397,000. The position in the publishing company was initiated during the first quarter of 2012 and as the stock more than doubled since then, the stake was cut from the initial 1.66 million shares, although during the second quarter of 2012, Mr. Buffett boosted his exposoure to Lee Enterprises, Incorporated (NYSE:LEE) to 3.23 million shares. In its last financial report, for the first quarter of fiscal 2015, the company posted revenue of $175 million, slightly down from $176 million a year earlier, while its profit declined by 17% on the year to $10 million on the back of increased operating expenses and other costs. Billionaire David E. Shaw’s D.E. Shaw is another investor that holds around 226,000 shares of Lee Enterprises, Incorporated (NYSE:LEE) as of the end of last year. 

Disclosure: none