Warren Buffett, the proverbial king of value investing, who has
beefed up his conglomerate from ice-cream to insurance, is eyeing
an attractive opportunity.
Berkshire Hathaway Inc.
), of which Buffett is the chairman and CEO, revealed a huge cash
hoard of $55.5 billion as of Jun 30, in its second-quarter earnings
release. Of the total, almost 90% came from the company's insurance
operations, which are traditionally the most profitable. This wide
moat gives Buffett ample fund for acquisitions, capital
expenditures and most of the company's operations.
Buffet's investment choice is quite clear. He believes, "It's far
better to buy a wonderful company at a fair price than a fair
company at a wonderful price" and is willing to wait for one. With
enough dry power $35 billion ($20 billion to be kept in cash
coffers) Buffett is just ready to pull the trigger.
Buffett Waiting for Right Entry Point?
But the improving mood of financial markets in recent years has
made it tougher for Buffett to lock in investments which befit his
value style investing.
The markets have been bullish for over 5 years and the equities
have shown a remarkable rise since the last recession. Even after
losing last month, the S&P 500 Index stands at a level which is
nearly 3 times higher than its 2009 low. Equity benchmarks are
advancing, ignoring the troubles created by the annexation of
Crimea by Russia; slowing growth and credit concerns in China;
mixed U.S. economic data; and sectarian tensions in Iraq.
Buffett has always had an eagle's eye for those stocks that have
generally have been side-lined in the marketplace but have good
fundamentals and can be purchased at a bargain, compared with book
value, replacement value or liquidation value.
Some of the big purchases made by Buffett included railroad
Burlington Northern Santa Fe for $26.5 billion in 2009, chemicals
giant Lubrizol for $10 billion a year later and H.J. Heinz for $28
billion in 2013.
Buffett's unprecedented investments in Berkshire have driven growth
for the company. The company's latest annual filing shows
that Berkshire's book value has grown at a compounded annual gain
of 19.7% compared with 9.8% gain for S&P 500 from 1964 to 2013.
Market Correction Anytime Soon?
A significant market correction would present a buying opportunity
for Buffett. Last week former Federal Reserve chairman Alan
Greenspan said that he expects market to see a significant
correction after having recovered for so long.
Most of the S&P 500 companies have reported second-quarter
results and the season has been positive, with company managements
generally reporting upbeat outlooks for the rest of 2014. Strong
corporate fundamentals should therefore provide good support for
share prices going forward and further propel the rally in the
Moreover, a nod from the Fed about the rebound in economic activity
and an improvement in labor market conditions in its latest meeting
also signal that equities will gain.
3 Stocks Buffett Might Be Interested In
Buffett's acquisition choices have changed over time. While at the
start of his career he would look for lesser-known companies
trading at bargain prices, more recently he has been favoring
larger, higher quality names at reasonable prices. We believe the
change is just appropriate since he now manages many billions of
dollars at Berkshire Hathaway, and therefore buying small firms
would be like bolt on acquisitions and not make much difference to
the company's overall results.
Below we point out some promising stocks which have the capacity to
deliver. Needless to mention that looking out for value stocks amid
the bull-run is a challenging task, since valuations are stretched
across the markets. The primary measures used to define value
stocks are price-to-earnings ratio (the price of a stock divided by
the current year's earnings per share) and price-to-book ratio
(share price divided by book value per share). Value stocks have
relatively low price-to-earnings and price-to-book ratios.
We have listed three stocks with a forward PE ratio below 15 and
Price/Book Value (P/B) less than 2.5. with a debt-to-equity ratio
of less than 1.
These stocks have trailed the S&P 500 in terms of year-to-date
price returns, and thus possess attractive valuations. In addition,
these stocks with a favorable Zacks Rank have posted positive
earnings surprise over the past four quarters and have are
witnessing upward estimate revisions.
Capital One Financial Corp.
With $45.5 billion of market capital, this is a diversified banking
company focusing on consumer and commercial lending as well as
deposit origination. The company's steady capital deployment
activities make it an attractive pick for investors. Capital One
continues to witness a rise in net revenues.
In 2012, the company acquired ING Direct USA, which boosted the top
line significantly. The company also has a strong Credit Card
business and maintains a geographically diversified loan and
The stock has gained 4.7% year-to-date.
Forward P/E = 10.4x.
P/B Ratio = 1.04
Debt to Equity Ratio of 0.85
Zacks Rank #2 (Buy)
Principal Financial Group Inc.
Ranked among the Fortune 500 companies and with a market
capitalization of $14.6 billion, it provides an expansive range of
retirement savings, investment and insurance products and services
through its various subsidiaries. The company's Asset Under
Management shows a steadily increasing trend. Several recent
acquisitions are also expected to increase its asset under
Moreover, Principal Financial's capital deployment through share
buybacks and dividend payment looks impressive, making it an
attractive pick for investors.
The stock has gained 3.3% year-to-date. It has a PEG Ratio of 1.
Forward P/E = 11.7x.
P/B Ratio = 1.44
Debt to Equity Ratio =0.24
Zacks Rank #2 (Buy)
Lincoln National Corp.
With market capitalization of $13.6 billion, it is a diversified
life insurance and investment management company that is structured
to suit the needs of all economic strata, adding value to
client-investments and mitigating risks related to retirement
planning. Higher asset-based fee revenues, improved spread income
from interest-sensitive products and lower amortization of
intangibles, have driven Lincoln National's earnings over the past
Lincoln National has taken steps to protect and build its capital
base and mitigate balance sheet risks. The company adopts strong
asset and liability management practices from time to time,
including equity and interest rate hedging programs, which
partially mitigate risk exposure. The company is focused on product
development to increase its competitive position among small to
mid-sized corporates and employee benefit markets as well as to
capitalize on opportunities from regulatory changes effective in
The stock has gained 3.5% year-to-date. It has PEG Ratio = 0.90,
which indicates future growth.
Forward P/E = 10.4x.
P/B Ratio = 0.93
Debt to Equity Ratio =0.33
Zacks Rank #2 (Buy)
Will these stocks live up to the expectations of The Oracle of
Omaha? Though these metrics help in picking the right stocks,
fundamentals and other qualitative aspects of a company also play
PE ratio and PB ratio combined with a solid Zacks Rank, rising
earnings estimate revisions as well as and a moderate debt position
are nonetheless solid indicators of lucrative stocks in an
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CAPITAL ONE FIN (COF): Free Stock Analysis
BERKSHIRE HTH-B (BRK.B): Free Stock Analysis
LINCOLN NATL-IN (LNC): Free Stock Analysis
PRINCIPAL FINL (PFG): Free Stock Analysis
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