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

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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.

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