Should You Buy Stocks Discarded By Warren Buffett ?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You may know the phrase "..... our favorite holding period is forever," part of a famous line uttered by mega-billionaire investor and philanthropist Warren Buffett. However, occasionally, stocks that are part of the portfolio of his holding company Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) are sold off, or the stake is reduced. It is done mainly to free up funds for other stocks that Mr. Buffett or his investment managers think are more worthy. After all, there isn't an unlimited supply of money.
While much of Berkshire's value and earnings are derived from owning outright entire companies, like Geico Insurance and BNSF Railroad, some still is based upon the value of publicly traded businesses in the portfolio.
Berkshires investment team, including Vice-Chairman and long-time Buffett friend Charlie Munger still have to rely on getting good returns from partial ownership in companies. Therefore, they are always on the lookout for good value, not willing to pay too much. To them the price to book ratio is an important stat to look at. The lower the better. This has led to fantastic returns on Berkshire shares in the past, including a gain of about 30% so far this year. Expect the great performance to continue in the future, especially if the recent stock moves pan out.
One of the new stocks purchased with that capital is farm equipment manufacturer Deere and Co. (NYSE: DE). High commodity prices, potential growth in farm income, exports to emerging markets and a great management team will benefit the Moline, IL company, better known as John Deere, over the long term. So far Deere has been a slow starter in the portfolio, down about 2% this year, way behind the overall market. The company has been growing, albeit slowly, recently. Expect that to pick up in the future. Over the long term Deere will probably fit in nicely in and become a solid performer for Berkshire.
Are any of the stocks Berkshire discarded worth looking at for your own portfolio?
Flight from pharmacy and medicine
One of the holdings liquidated was that of the pharmacy giant CVS Caremark (NYSE: CVS). Shares purchased in 2011 at average prices between $32 and $38 were sold off between roughly $43 and $48 about a year later, a much shorter period than "forever". The current price for the stock is around $59.
Maybe Berkshire should have been held onto CVS a bit longer. The company is a big player in a high growth industry. The primary drivers for expansion will be generic drugs, the corporate benefits business, and in-store clinics. The company has over 7,000 stores now and more are planned to be opened. There is plenty of momentum in its favor, as the stock is up 22% year to date, exceeding both Deere and the overall market.
Another company that is still part part of the Berkshire family, though the stake has been pared down substantially, is medical device and drugmaker Johnson and Johnson (NYSE: JNJ).
It also has been a good performer since Berkshire got rid of 95% of the shares it once owned. Year to date the stock is up 21%. Mr. Buffett may have thought that Johnson and Johnson was overpriced and he could do better elsewhere. Its current P/E is about 23, a bit higher than the overall market and its recent past. Primarily considered a defensive stock and well known for its consistent dividend growth, Johnson and Johnson may be under short-term selling pressure going forward if the Fed eases off its bond buying program, and forces interest rates to creep up. Income investors may look elsewhere.
Still, with earnings and cash flow projected to grow, a strong management team in place, and a record of payout increases spanning a half century, the stock may be worth holding onto in your portfolio.
There is another famous saying that could apply to this situation: "beauty is in the eye of the beholder". An investor buying two stocks, CVS and J&J, that were discarded by Berkshire Hathaway, may be the one uttering that phrase in the future. In addition, it may be wise to consider Berkshire Hathaway shares as well.
More from the Motley Fool
Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The One REMARKABLE Stock to Own Now." Just click here to get started.
Mark Morelli owns shares of Johnson & Johnson. The Motley Fool recommends Berkshire Hathaway and Johnson & Johnson. The Motley Fool owns shares of Berkshire Hathaway and Johnson & Johnson. 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!