Warren Buffett 's incredible success in thestock market has
been built on two principles.
The first is his long-termbuy-and-hold mentality. Buffett likes
to invest in companies with strong fundamentals and staying power
that operate in industries with high barriers to entrance. That
enables Buffett to hold on toshares for the long haul without
having to worry about new players disrupting the competitive
Owningstocks for the long haul has produced some of Buffett's
biggestgains . Take
The Washington Post Co. (
, for example. Buffett first began buying shares in 1973,
recognizing the company's long-term potential in the highly
insulated media business. Forty years later, Buffett still owns
those shares and is now sitting on a 6,800%gain , with his $11
millioninvestment ballooning to $820 million in spite of shares
falling 50% in the past 10 years.
The second hallmark of Buffett's investment style is his ability
to sniff out a good bargain. Buffett is one of the kings of
valueinvesting , noting that the essence of value investing is
buying stocks at less than theirintrinsic value . This investment
style has also produced huge winners for Buffett.
American Express (
became embroiled in a financial controversy after a vegetable oil
company obtained hugeloans through falsified documents. The event
ended up costing American Express $58 million, sending shares
down 50% in a panic. But seeing that it was a misstep for an
otherwise strong company that was cashing in on the growing use
ofcredit cards, Buffett stepped in and began buying shares at a
big discount. Today, Berkshire's 151 million shares are valued at
$8.7 billion, a 680% return on a $1.28 billion investment.
Although both of thoseinvestments were initiated decades ago,
Buffett is still practicing his love of stocks with value.
Recent13-F filings from
Berkshire Hathaway (NYSE: BRK-A)
show that two of Buffett's biggest stock buys in the first
quarter were financial stocks with value. That means that Buffett
thinks they are trading below intrinsic value. It also means that
Buffett probably intends to hold for the long haul. That is a
chance for regular investors to mimic the moves of one the
greatest investors of all time and trade alongside Buffett.
Here are two big value plays Buffett made in financial stocks
during the first quarter.
Wells Fargo (
Buffett was busy loading up on shares of Wells Fargo between
January and March, closing thisyear 's first quarter with 460
million shares, up 4% from last year and his biggest holding with
a 20% allocation.
Buffet has beenbullish on the financial sector, and he has been
making some of his biggest bets with Wells Fargo. The bank's
forwardP/E (price-to-earnings) ratio of 11 is in line with its
industry peers but a discount from its 10-year average of 13,
driven by a big recovery inearnings in the past four years.
Looking forward,analysts are projecting annual earnings growth of
8% in the next five years, exactly the kind of steady earnings
growth that Buffett loves. And with a 3%yield , Wells Fargo also
pays a nicedividend that handily beats the 2.1% yield on the
10-yearTreasury note .
U.S. Bancorp (
But while Buffett has been accumulating shares of Wells Fargo for
years, he initiated a new position in another bank stock during
the first quarter. Berkshire Hathaway disclosed ownership of 50
million shares of U.S. Bancorp, Berkshire's seventh-largest
holding with a 2.6% allocation.
U.S. Bancorp also trades in value territory, with a forward P/E
ratio of 11.5 safely below its 10-year average of 12.5. As a
midsize bank with limited international exposure, U.S. Bancorp is
a domestic financial play. Analysts are calling for annual
earnings growth of 8% in the next five years, in line with the
industry average. U.S. Bancorp also carries adividend yield of
2.2% that also beats the yield on the 10-Year Treasury.
Risks to Consider:
Financial stocks have been surging on the recovery in
housing. Although housing prices continue to rise, weakness in
the sector would be a drag for banks.
Action to Take -->
Buffett built his reputation by buyingundervalued stocks and
holding them for the long haul. Recent 13-F filings reveal that
Buffett is still using those strategies to find new
opportunities. Wells Fargo and U.S. Bancorp were two of Buffett's
biggest buys in the first quarter, with both stocks trading at a
discount to historical valuations. That means Buffett probably
plans on holding for the long haul, giving regular investors a
chance to invest with a true master who usually wins big.
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