Is Now a Good Time to Monkey Warren Buffett?

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

There are few people whose words can move entire markets, and Warren Buffett is once such man. While the famed value investor and Berkshire Hathaway have disclosed surprising 13F filings before, this quarter's is especially interesting, as new positions in Deere & Company (NYSE: DE) and Precision Castparts (NYSE: PCP) were disclosed, along with massive cuts to General Electric (NYSE: GE)Johnson & Johnson (NYSE: JNJ), and United Parcel Service (NYSE: UPS).

All in all, it's Buffett's position in Precision Castparts that may be the most under the radar, as Bloomberg had originally reported earlier this year that the investor was considering a stake in Deere. Either way, both newly established positions are a welcome sight for each company's shareholders. Berkshire's total investment in Precision Castparts, a metal fabrication and industrial goods manufacturer, amounts to 1,248,901 shares worth an approximate $216.4 million. Deere, on the other hand, now accounts for close to 5% of Buffett's total 13F portfolio, worth an estimated market value of $337.2 million.

The size of Buffett's investment in Deere puts it in Berkshire's top ten holdings, above such stalwarts like ConocoPhillips and DirecTV. At the moment, it looks like it wouldn't be a bad idea for individual investors to mimic, or "monkey" Buffett into the agricultural machinery company, as it trades at rather attractive trailing (11.3X) and forward (10.2X) earnings multiples. Both valuations are below Deere's historical average by 30%-40%, and revenues also trade at a discount.

On the whole, Deere is expected to see its EPS grow by an average rate of 8.9% a year over the next half-decade, though this is nearly half the rate of expansion the company has maintained post-recession. In its most recent earnings report, Deere missed the Street's forecast by nearly 15%, as slowing overseas sales and production line delays hurt both top and bottom line financials. In the nearly three months since the release, however, the stock has risen nearly 6%, possibly a partial result of Buffett's bullish behavior. Deere is a value play, through and through, but needs to impress with its fourth quarter earnings to avoid a late-year decline. Sell-side analysts expect Q4 EPS to come in at $1.87, up 15.4% year over year. Deere reports Q4 financials on November 21st.

Precision Castparts, meanwhile, has been up close to 7% over the past month, as the company recently bought Titanium Metals Corp. for close to $2.9 billion. Titanium Metals, one of the largest producers of titanium in the world, will add a significant amount of "value creation" to Precision, according to the company's CEO Mark Donegan.

Interestingly, Titanium Metals has become an increasingly large supplier to aerospace manufacturers like Boeing, as titanium's usage in this industry continues to increase.Precision Castparts had also dabbled in this arena, producing entire aero-structures for a few major players, but the addition of Titanium Metals should shore up this segment of its business. Precision currently trades at an attractive forward P/E below 13.0X, but has disappointed the Street's earnings expectations in four of the past five quarters. On the whole, we like the company because of Buffett's endorsement, and because of its recent acquisition.

Last but certainly not least, we must discuss Buffett and Berkshire's decision to downsize their positions in GE, Johnson & Johnson, and UPS quite significantly. GE, which did total more than 5 million shares in Buffett's 13F one quarter earlier is now a shave under 600,000; this is a whopping 88% reduction. Johnson & Johnson, which had been one of the fund's favorite healthcare stocks, was reduced by more than 95%, and now accounts for just $34 million worth of Buffett's multi-billion portfolio. Berkshire's position in UPS, meanwhile, has been downsized by 77.3%, marking the second straight quarter of a sell-off. The air courier company that amounted to a $115 million position for Berkshire in March of this year is now worth just $4.1 million.

Off these three 'Buffett bears,' only UPS is in the red for 2012; shares of the company have lost close to 4% since the start of the year. Johnson & Johnson and GE, on the other hand, are up 5.6% and 11.7% on the year, though each has fallen off a bit in recent weeks. In late October, GE reported third quarter revenue that fell below analyst estimates, and shared a rather bleak outlook for 2013. The company's execs cut year-ahead revenue growth forecasts from 5% to 3%, as it expects Europe to weigh most heavily on its top line. Shares of GE currently trade at moderately attractive valuation metrics, but it's never a good sign when the company, and Warren Buffett of all people, are feeling blue.

Johnson & Johnson and UPS are trading at similarly cheap forward earnings multiples of 12.6X and 13.7X respectively, though each is expected to experience single-digit EPS growth over the next five years. Johnson & Johnson actually impressed the Street with its Q3 results last month, outpacing estimates by 3%, on the back of Zytiga, Xarelto, and Stelara, three drugs that have been recently approved by the FDA. There are reasons to be bearish on Johnson & Johnson, though, as dividend growth is slowing and book value is at a premium to the averages of the drug manufacturing industry and the S&P 500.

UPS reported rather disappointing Q3 financials, as earnings fell 56% year over year, and international shipping volume fell 1.2%. As a key player in the global shipping industry, UPS will always be sensitive to economic instability and exchange rate fluctuations, and it's not exactly operating with any competitive advantage in the air delivery marketplace.

Our advice: consider the reasoning behind Buffett's bearish behavior in UPS, Johnson & Johnson, and GE, and think of the possibilities that a stagnant global economy will have on all three. If you're looking to make a buy off of any of his 13F plays, Precision Castparts may be the best option, as its recent acquisition gives it a key foothold in the titanium manufacturing industry almost overnight. Deere, now one of Buffett's top holdings, also looks like a solid investment, though it needs to impress with its fourth quarter earnings to see any short-term appreciation.


This article is written by Jake Mann and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of General Electric Company, Johnson & Johnson, and Precision Castparts. Motley Fool newsletter services recommend Johnson & Johnson, Precision Castparts, and United Parcel Service. 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.

blog comments powered by Disqus