Warren Buffett is widely regarded as one of the most successful investors in the world. Ordinary investors follow him. Seasoned professional money managers also follow him closely. Buffett recently released Berkshire Hathaway’s latest stock holdings in a 13F filing. The positions at the end of the fourth quarter are not very different from those at the end of the third quarter. But Buffett still made some changes. In this article, we are going to discuss the positions on which Buffett increased his bets over the fourth quarter. Among his holdings these stocks are more likely to be undervalued.
Wells Fargo & Co (WFC): WFC is the third largest position of Buffett’s latest 13F portfolio. During the fourth quarter, Buffett boosted his WFC stakes by about 6%. As of December 31, 2011, Berkshire Hathaway had more than $10 billion invested in this position. WFC is a very popular stock among hedge funds tracked by us. At the end of the third quarter, there were 69 hedge funds with WFC positions in their 13F portfolios, including John Paulson’s Paulson & Co, Lee Ainslie’s Maverick Capital, and Ken Fisher’s Fisher Asset Management.
WFC reported strong fourth-quarter results. For the three months ending December 31, 2011, the company reported net income of $4.1 billion, or $0.73 per share, up from $3.4 billion, or $0.61 per share, for the same period in 2010. In addition to the impressive earnings growth, the company also has expanding profit margins and attractive valuation levels. WFC has a low forward P/E ratio of 8.61 and its EPS is expected to grow at an average of 9.6% per year for the next five years. So its P/E ratio for 2014 is 7.2. In fact, many other financial companies are also trading at low multiples. For example, Bank of America Corp (BAC) has a forward P/E ratio of 7.36 and Citigroup Inc (C)’s forward P/E ratio is 7.0.
DirecTV (DTV): Over the fourth quarter of 2011, Buffett significantly boosted his position in DTV by 379%. At the end of last year, his Berkshire Hathaway reported owning $870 million worth of DTV shares. At the end of September, there were 33 hedge funds disclosed to own DTV in their 13F portfolios. Roberto Mignone’s Bridger Management also had $82 million invested in this stock. We like DTV. It has a strong record of increasing earnings, solid financial position, and reasonable valuation levels. DTV has a low forward P/E ratio of 8.31 and it is expected to grow at 17.58% per year over the next five years. This indicates that DTV’s P/E ratio for 2014 is only about 6. The main competitors of DTV include Comcast Corporation (CMCSA) and Dish Network Corp (DISH). CMCSA’s 2014 P/E ratio is 10.5 and DISH’s is 9.2, both higher than that of DTV.
During the fourth quarter of 2011, Buffett also increased his positions in International Business Machines (IBM), Visa Inc (V), CVS Caremark Corp (CVS), and Intel Corp (INTC). We like his bets on technology stocks such as IBM and INTC. We think they are trading at discounts and have great potential to generate decent returns in the future. We like CVS too. It has a relatively low forward P/E ratio of 12.03 and it has a double-digit expected growth rate. We believe stocks are cheap at the moment and Buffett knows that too. Even stocks like Visa with high current P/E ratios are attractive picks. The premium you need to pay to buy these high growth companies is much lower than what it used to be. Visa’s 2014 P/E ratio is 11.6, versus 10.97 for Mastercard Inc (MA) and 9.3 for American Express Company (AXP).