Friday, May 2

5 Buffett picks with big upside

5 Buffett picks with big upside
Business Week | By Meena Krishnamsetty and Matt Doiron, MarketWatch

Here are the largest holdings by Berkshire Hathaway as of March 30 that had value-investor appeal due to their low P/E-to-growth ratios.

Warren Buffett's holding company, Berkshire Hathaway (BRK.A), filed its first-quarter 13F with the Securities and Exchange Commission last month. We've found that 13Fs can be used to develop profitable investment strategies -- for example, the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year).

And it's always useful to examine moves by Buffet, given his track record in unearthing value in the market.

We also like to screen filings from investors like Buffett to find stocks that satisfy various investment criteria, such as those with low P/E-to-growth (PEG) ratios. The PEG ratio combines the price-to-earnings multiple with analyst expectations for future growth rates, and while analyst forecasts are frequently inaccurate, the ratio offers a way to estimate a stock's upside potential.

Here's a quick take on the five largest holdings in the Oracle of Omaha's investment vehicle at the end of the first quarter that had five-year PEG ratios of 0.9 or lower.

The holding company increased its stake in DirecTV (DTV) by 10% during the first quarter of 2013, to a total of over 37 million shares. With a trailing earnings multiple of 13 and with the sell-side predicting high earnings growth at the satellite TV company, the PEG ratio comes in well below 1.

However, we'd note that revenue grew only 8% last quarter compared with the first quarter of 2012 with earnings actually declining. DirecTV was one of the top picks in Southeastern Asset Management's portfolio; that mutual fund is managed by billionaire Mason Hawkins.

Oil and gas refining and marketing company Phillips 66 (PSX) was another of Buffett's high upside potential picks with the filing disclosing ownership of more than 27 million shares. Downstream oil and gas companies are generally seeing low earnings multiples in the current market environment, and the fairly recent ConocoPhillips (COP) spinout is no exception with both trailing and forward P/Es of 8.

With analysts expecting earnings per share to improve over the long term, we get a five-year PEG ratio of 0.7. Phillips 66 has risen about 80% in the last year. Gilchrist Berg, Steve Cohen, Colin Hall, and Manish Chopra are among hedge fund managers with bullish PSX positions.

Berkshire reported a position of 25 million shares in General Motors (GM), unchanged from the beginning of the year. GM trades at 11 times trailing earnings. Many market players, including a large share of analysts, billionaire David Einhorn, and apparently Berkshire's team as well, believe that auto makers are set for high growth as U.S. consumers replace an aging auto fleet and economic conditions in other markets improve.

However, recent reports show lower revenue and earnings at GM than a year ago. General Motors made our list of the most popular stocks among hedge funds in Q1 2013 (check out the full top 10 list).

Buffett was buying shares of $29 billion market cap oil field equipment and services company National Oilwell Varco (NOV) between January and March. At that valuation the stock carries trailing and forward P/Es of 12 and 10, respectively, and analysts are looking for enough growth to give it a Peg ratio of 0.9.

While revenue was up strongly in the first quarter of 2013, however, net income fell by over 20% and so we'd have to investigate it more closely before buying. Viking Global, managed by billionaire and Tiger Cub Andreas Halvorsen, initiated a position of 2.7 million shares during Q1.

A new position in Berkshire Hathaway's portfolio for 2013 was its 6.5 million shares of Chicago Bridge & Iron (CBI), a $6.3 billion market cap company which provides infrastructure engineering services primarily to energy customers.

The business stands to benefit from increased production of natural gas, and so while its trailing earnings multiple is fairly high at 21 analysts believe that it is actually undervalued -- that same valuation is only 12 times forward earnings estimates. Julian Robertson, Siddharth Thacker, and Ricky Sandler are betting on the stock.

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