Investment Insights from Warren Buffett’s Big Buys
Aubrey is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article looks into the fourth quarter big buys of Warren Buffett’s Berkshire Hathaway. Mr. Buffett needs no introduction, and every move he makes is considered with the highest regard. In the fourth quarter, Berkshire Hathaway had $75.3 billion assets under management. Its big buys were Wells Fargo & Company (NYSE: WFC), DaVita Inc. (NYSE: DVA), General Motors Company (NYSE: GM), WABCO Holdings Inc. (NYSE: WBC), and Archer Daniels Midland Company (NYSE: ADM). In search for really good investment insights, I have analyzed these companies briefly from a fundamental perspective.
Sources: finviz.com, nasdaq.com, and whalewisdom.com; as of Feb. 14, 2013
The fund manager bought 17.308 million more shares of Wells Fargo in the fourth quarter; these additional shares are worth around $590 million. The bank is Berkshire Hathaway's top stock, with a share equivalent to 19.96% of its total portfolio. WFC is destined for greatness; it has consistently exceeded consensus estimates in earnings for the last four consecutive quarters. This is attributed to consistent positive revenue growth and impressive profit margins of over 20 percent. Investors can therefore sit back and relax, for their dividend income is safe and growing at WFC. The company has doubled its dividend payments in the past couple of years. For instance, in 2010 the annualized payment was a mere 20 cents per share; it went up in 2011 to 48 cents, then to 88 in 2012. Also, if you think that the current surge in the stock price is about to peak, consider that WFC’s valuation is still at a healthy level with a P/E ratio of 10.48 and a PEG at a pretty level of 1.17. Furthermore, earnings are estimated to grow at an average rate of 8.9 percent in the next five years.
Berkshire Hathaway increased its stake in the health services company DaVita by 33 percent in the latest quarter. The holding was equivalent to 2 percent of the fund manager's portfolio. Although DVA managed to surpass earnings estimates in the previous quarters, it has failed to do so in the latest quarter (ending in September 2012.) Meanwhile, the company has maintained its profit margin of 7 to 8 percent. Recently, it has been impressively growing its revenues at a double-digit rate. As of September 2012, its profit margin was 11.67%, way higher than it was in the same period in 2011 at 6.56%. In the next 5 years, earnings at DaVita are expected to grow by over 13 percent annually.
Berkshire Hathaway also bought 10 million additional shares of General Motors common stock in the fourth quarter, bringing the total holding to 25 million shares worth over $720 million. This does not come as a surprise, as the company has remarkably exceeded consensus estimates within the last 3 consecutive quarters. In fact, the surprise rate in the quarter ending in Sept. 2012 was an impressive 52%. The motor company's profit margin is at a stable rate of 3 percent, while revenue has recently grown at a positive rate of 2.33%. GM’s growth prospects are encouraging, with earnings estimated to grow by an average rate of about 12 percent in the next 5 years.
The fund manager doubled its position in the auto parts maker WABCO in the latest quarter, bringing the total shares owned to 0.35 percent of the total portfolio. The company exceeded earnings estimate in previous quarters, but failed to do so in the latest by a small margin of less than 2 percent. Meanwhile, although its profit margin has been remarkably stable at a double-digit rate, quarterly revenue has been on the slump at a comparable rate. As of Sept. 30, 2012, profit margin is at 13.17%, while revenue went down by 16.71%. The stock price of WABCO is going up at a robust rate, thanks to its huge growth prospects in the years to come. WBC’s earnings are estimated to swell by an average annual rate of 20 percent in the next five years.
Archer Daniels Midland
Berkshire Hathaway initiated a position in Archer Daniels worth about $163 million in the latest quarter. The farm products company comprised 0.22 percent of the fund manager's total portfolio. ADM has failed to meet consensus estimates in the latest quarter by a notable margin of 27 percent. Nonetheless, the company has maintained its profit margin at about 2 percent. Its revenue also grew by 6.93% in the fourth quarter, which marked a significant recovery when compared to the previous quarters of 2012, when the growth ranged from -0.43% to 5.37%. ADM continues to pay dividends to its investors by an increasing amount. Within the last 3 years, the annualized dividend grew by an average rate of 7.7%. The stock price is in an upward swing because of the company’s encouraging growth expectations. The earnings per share have grown by 10 percent annually within the next 5 years. It also enjoys a healthy valuation for its P/E ratio of 15.10.
Warren Buffett’s big buys indeed present a good mix of stocks. It is apparent that the fund manager put emphasis on healthy valuations. All of these stocks have been exhibiting robust stock prices and still got huge allowance in their valuations. Despite the downward trend in the revenues of some, they are able to balance these through their high margins. Likewise, placing an excellent dividend stock like WFC, which has a remarkable payment growth, on top of its portfolio guarantees the fund manager dividend income of at least $387 million in a single year based on the 2012 annualized amount. This is indeed a great strategy that investors should emulate.
aubrey1102 has no position in any stocks mentioned. The Motley Fool recommends General Motors and Wells Fargo. The Motley Fool owns shares of Wells Fargo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!