2 Beaten Down Stocks that Buffett Loves
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffett has been called many things; most of those nicknames contain the words “genius,” “oracle,” or “Chuck Norris.” Okay, we’re kidding about the last comparison to the world’s greatest action hero, but only slightly. In the financial world, it’s hard to beat the Buffenator, both in terms of quotable sayings (seen here), and investment returns. While Buffett’s Berkshire Hathaway has been a profit-generating stock in its own right, it’s also useful to analyze what the magnate holds in his portfolio, courtesy of his 13F filings with the SEC.
While many money managers hold 100 to 200 positions in their portfolio, Buffett believes in simplicity, electing to hold between 30 and 40 stocks. As he has said many times, his holding period is “forever,” meaning he only invests in the most financially sound companies. While his stock picks shouldn’t serve as a laundry list for your portfolio, they can be a starting point for further research. Without further ado, here are two beaten down stocks that Warren Buffett loves, despite the fact that they’ve been in the red for 2012.
Washington Post Company (NYSE: WPO)
It would be a misnomer to call the Washington Post a “newspaper” company; the majority of its revenues come from its Kaplan education business, in addition to its cable TV operations. Since the start of 2012, shares of WPO have dropped 12.4%, falling flatter than its primary competitors Gannett Co (NYSE: GCI), which has gained 8.2%. At its current price in the $330 range, the Washington Post is trading at a Price-to-Earnings ratio (22.5X) below its own 5-year (33.1X) and 10-year (30.4X) historical averages. Factoring growth into the equation, WPO sports a PEG of 0.7, which is below GCI (2.8) and its own fair valuation (1.0-2.0).
The company did report a year-over-year Q2 profit decline of 29%, which is a far cry from its 3-year average EPS growth (30.4%), which has outpaced the education and training services industry average (22.1), and GCI (4.2%). Now, WPO has claimed its recent floundering is a result of high restructuring costs in its Kaplan and newspaper divisions, but the bears are rightfully concerned about declining print circulation, decreased ad sales, and the company’s failure to monetize online users.
It appears that Buffett’s view of WPO is unwavering, though, as he currently owns a 27% stake in the company worth over $570 million. If the Washington Post can reach the Street’s year-end consensus – and that’s a big if – fairly valued shares of WPO can vault above $370, but the economic headwinds are disconcerting to say the least.
General Dynamics (NYSE: GD)
The fourth largest defense contractor in the world, General Dynamics has four divisions: land, water, air, and cyber systems. While it is known for its production of wartime staples like the F-16, GD actually receives the most revenue from its tech branch. In 2012 thus far, the stock has fallen 5%, returning less than competitors like Northrop Grumman (NYSE: NOC) and Raytheon Company (NYSE: RTN). While all U.S. based defense contractors have the looming cloud of budget cuts on the proverbial horizon – $480 billion over the next 10 years to be exact – General Dynamics is actually less exposed to austerity than most of its peers; it receives around 72% of its revenue from the Department of Defense. RTN (90%) and NOC (90%) are both more reliant on Uncle Sam.
At its current market price in the $63 range, shares of GD are trading at a P/E ratio (9.2X) below the industry average (12.7), and its own historical averages, both from a 5-year (11.5X) and 10-year (14.2X) standpoint. Moreover, the company has grown its operating (18.5%) and free (17.4%) cash flows quite nicely post-recession, but it trades at a Price-to-Cash Flow ratio (6.7X) below industry norms (9.9X) and RTN (9.3X).
Assuming General Dynamics reaches analysts’ year-end EPS estimates of $7.10, fairly valued shares can eclipse the $80 mark over the next six months. WealthLift’s Sentiment Index rates GD as a strong buy, with the overwhelming majority of the community’s users placing an “overperform” rating on the stock.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics, Northrop Grumman, and Raytheon Company. 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.