3 Long Ideas From Warren Buffet's Favorite Low PE Stocks

Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Stock Markets have turned volatile again after touching their 52 weeks high last month. With earnings season starting and upcoming election, this volatility may continue. Also, after an 11% gain in the S&P since June, there are not many value picks available and one needs to be stock specific at this point in time. I scanned value investing guru Warren Buffett’s portfolio for investing opportunities. The following holdings of Berkshire Hathaway are still trading at Low PE's and appear to be attractive buys.

Company

No. of Shares Held by Berkshire Hathaway

 Forward PE

Gannett Co. (NYSE: GCI)

 1,740,231

 8.15

DIRECTV (NASDAQ: DTV)

 28,420,700

 9.57

General Dynamics Corporation (NYSE: GD)

 3,877,122

 8.90

Here is a brief analysis of each of these stocks:

Gannett Co.

Gannett possess solid balance sheet and generates significant free cash flow. Its Cost & Asset Optimization program is expected to save around $150 million. This along with its share repurchase plans of $300 million is likely to have a substantial positive impact on GCI’s total EPS.

GCI broadcasting division sees support in Q3 from advertisement revenue from Olympics and higher political advertisement spending in US presidential poll. The company’s Digital Marketing Services revenue is also expected to rise by 8% y/y in Q3 2012 and 10% y/y in the next year. On the other side, the “All Access” newspaper model is set to increase pretax profits by $100 million during 2013. It’s worth to mention that GCI has a solid newspaper franchises in small, local markets in US which gives it an unparalleled presence as a local advertising medium compared to other key players.

In the middle of digital transformation and increasing circulation revenues (thanks to tailored content on market by market basis!), GCI appears to be a good addition to investor's long term portfolio.

Direct TV

Surpassing the industry average cash flow growth of 14.81% and strong revenue growth of 9% in Q2’12 (y/y), DTV has shown its ability to perform in slowing US market. At 4.684 million subscribers, DTV holds 31% of the market (15.122 million). Its growth driver in US; pay/view subscription witnessed growth of 3% annually in last three years. Its focus on DVRs, HD content and its exclusive NFL contract will boost its performance in Q3. It will also get leverage from its competitors less aggressive promotional offers in the US.

On the other hand its leadership position in Latin America, especially in Brazil and Mexico, is expected to be the major growth driver in the long term. The LatAM market is still in growth phase and DTV’s focus on a tailored service offering, will help it grow at double digit rates in this market. Furthermore, it is expected to generate strong free cash flow which it will use for share repurchases. I think DTV will continue to show growth in its 9th consecutive quarter and I feel this stock still has good upside potential despite the fact that it has already risen in the past year. I recommend this as a buy.

General Dynamics

With an above average dividend yield and a diversified business model, General Dynamic appears to be the best bait. GD is increasingly losing its dependence on defense business which is growing at moderate pace, while its aerospace segment has seen good growth of 16% in the Q2’12 (Y/Y). It has a backlog of around 2 years for premium range large cabin jets, which are not affected by negative market scenario.

In addition to this there are few more catalysts for share prices. In September, 2012 Gulfstream (a wholly owned subsidiary of GD) got FAA certification for its G650 aircraft which is supposed to have a demand backlog of 5 years. On the other hand, its marine sector has also shown impressive performance. With US congress reassuring their shipbuilding schedule, and GD’s association with Pacific Pivot strategy, it will further boost its marine sector contribution in its earnings.

With healthy balance sheet and good cash flow, we could see further M&A or shares buy-back. Hence I recommend this as a buy.


AnjaliPaliwal has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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