4 of Buffett's Fav's
While Warren Buffett's specific investment methodology is a mystery to most, the super investor has made no secret of a handful of rules for successful investing, among them: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" and "Our favorite holding period is forever."
With those Buffett-isms in mind, it makes more sense to examine the Oracle's existing portfolio for wonderful companies at fair prices than it does to try to guess his next pick -- especially considering his investment horizon. Here's a look at four companies that might just fit that bill this month.
Moody's is getting a lot of attention right now -- after all, the company is the reason for Warren Buffett's begrudging appearance in Washington this morning, a chance to answer for the substantial failings of ratings firms. Buffett, who owns 13% of Moody's through Berkshire Hathaway, was hesitant to appear before Congress, opining that he had no unique perspective on the situation, but Congress was eager to pick his brain nonetheless.
The realization that ratings agencies like Moody's fell seriously short of their duties to accurately disseminate risk has been a weight on the company's share price, knocking the company down 28% since the first trading day of 2010. But while that tumble has given the company's owners a financial black eye, it's actually put the company at a more reasonable valuation for market participants who were holding out.
To be sure, the company faces significant trouble right now, including expensive litigation and a litany of short-sellers who are betting that Buffett's wrong on this one. But increasing debt issues from companies and organizations around the world are just beginning to beef up Moody's business volume, and all of its competitors are currently on equal footing. Strong margins and a newly lowered share price make this company worth looking into.
With all the focus on Buffett's Berkshire Hathaway, it's easy for investors to overlook Wesco Financial, a company owned 80% by Berkshire that's run by Buffett's long-time partner Charlie Munger. It's no surprise that Berkshire owns a sizable stake in Wesco, a sort of mini-me version of its better-known parent, with businesses that operate in the insurance, furniture rental and steel industries. But with a significantly lower profile, this company remains a strong value -- for now.
Wesco trades for a very high price-to-earnings ratio right now, but that metric is misleading after the company reported sizable one-time losses in its first-quarter earnings. Instead, a price-to-book ratio that rings in under 1, a presciently managed balance sheet and exceptional margins should keep this company performing strongly for the foreseeable future.
New business deals and expansion plans should help take Wesco to the next level in the mid-term.
One of the best ways to know whether Buffett himself thinks one of his portfolio holdings is undervalued is simply by asking him -- or rather by taking a look at which positions he added since last quarter per his SEC-required filings. While Warren didn't initiate any new positions this quarter, he did add to a few holdings that were already open. Among them is Republic Services, the waste disposal services company that's owned by a number of other well-known investors, including Bill Gates' endowment.
Republic faces stiff competition in a fractionated industry, but the company has still managed to deliver 47% growth over the trailing three years -- through the acquisition of Allied Waste in 2008 -- without sacrificing its financial health. A 2.62% dividend yield sweetens the pot on this garbage stock.
Another stock that Buffett loaded up on last quarter is Iron Mountain, a $4.85 billion company that focuses on document storage and protection for commercial clients. Iron Mountain is the largest company in the document management industry by far, and its vast recurring revenue streams make it an attractive choice for investors who are looking for some semblance of stability in an otherwise volatile market.
At first glance, Iron Mountain doesn't look like an undervalued stock -- with an industry-high price multiples, it's hard to make a value case -- but with annual price increases set to take effect from now on, the company's discounted cash flow valuation still looks very attractive. That's the rationale for buying into this company right now.
To see the rest of Warren Buffett's plays, including a complete list of which stocks he added or sold off, check out the Warren Buffett Portfolio on Stockpickr.
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