If you're struggling to pick stocks in today's market, ask yourself: What would Warren do?
Picking stocks, always a tricky prospect, has gotten a lot tougher lately. A prolonged bull market has brought U.S. stocks near record highs, stretching price-earnings ratios and depressing dividend yields, which makes it harder to find a bargain. At the same time, economic uncertainties abound, with overseas markets in turmoil, the Federal Reserve waffling on the direction of U.S. interest rates, low oil prices hobbling the energy industry and the strong dollar wreaking havoc with earnings at big multinational concerns.
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Yet whenever investors are feeling particularly perplexed, they have a simple option. They can ask: What would Warren do? Thanks to the regularity of quarterly Securities and Exchange Commission filings, anyone with Internet access and enough curiosity to dig through mandatory 13F forms, which provide details about the holdings of institutional investment managers such as Buffett, can see what the world's most renowned investor owns. And by tracking back through older filings, it's possible to figure out what Buffett has been buying and selling in his $132 billion stock portfolio at Berkshire Hathaway (symbol BRK-B ). the company he heads.
Of course, you shouldn't imagine that you'll make a fast buck emulating Buffett, says David Kass, a professor of finance at the University of Maryland's business school, who studies Buffett and is a Berkshire shareholder. Buffett is usually looking for out-of-favor companies that are selling at a discount to their intrinsic value. He expects those bets to pay off in a matter of years—sometimes decades.
Still, if you're willing to get rich slowly, there's no better mentor than Buffett. Standard & Poor's 500-stock index has returned a respectable 9.9% annualized since 1965, when Buffet took control of a textile manufacturer called Berkshire Hathaway. But Berkshire's book value (assets minus liabilities), Buffett's preferred measure of his company's performance, has climbed an annualized 19.4%. And Berkshire's A shares (BRK-A ), which go back to 1965, have done even better, soaring from roughly $15 to an astonishing $215,421, for a gain of 21.6% annualized. "Investors with patience could do very well following his lead," says Kass.
If you want to emulate Buffett, you have two reasonable ways to go. You can invest in Berkshire Hathaway, which gives you a piece of every stock in Buffett's portfolio as well as the company's vast conglomeration of subsidiaries, ranging from See's Candies to insurer Geico. The other option is to buy the stocks that Buffett buys and to sell them when he's getting
out. So, for those taking that approach, what has Buffett been buying?
6 Stocks Buffett Is Buying
One stock to consider is Wells Fargo (WFC. $57.95). With $1.7 trillion in assets, Wells is the nation's fourth-largest banking company. Buffett has owned the stock for decades and consistently adds to his position. In the first quarter of 2015, Buffett hiked his Wells Fargo stake by 6.8 million shares, giving Berkshire a total of 470.3 million shares, which are worth $27.3 billion at today's share price. That makes Wells Fargo Berkshire's biggest holding. (Share prices and related data are as of July 21.)
Although the past few years have presented a challenging environment for banks, Wells has managed to eke out steadily rising profits despite slipping revenue over the past two years. Now, with the economy gaining steam, the prospects for all banks appear to be improving. That's mainly because banks earn the bulk of their money on the spread between the cost of deposits and the amount they can charge for loans. When interest rates start rising, banks can immediately charge more for loans, but the interest they pay on deposits rises slowly because customers typically are not quick to pull their savings or switch checking accounts for a slightly richer rate elsewhere.
Wells Fargo is particularly well-positioned for a rising-rate environment, says RBC Capital analyst Joe Morford. The company has a steady deposit base and plenty of cash to lend, and it has seen strong demand for commercial loans. Additionally, it is expanding its profitable credit card and investment management businesses.
The Kraft Heinz Co. (KHC. $80.22) was formed by the recent merger of Kraft Foods and H. J. Heinz Holdings, creating the fifth-largest food dynasty in the world. Berkshire now owns one-fourth of the company. Buffett is watching closely over that $25 billion investment by serving on the board, as are two other top Berkshire executives. Three other positions on the board are held by top-level executives at 3G Capital, a valued partner in several Buffett ventures. That gives Buffett and friends a slight majority of the board.
With brands ranging from Planter's and Oscar Meyer to Maxwell House, the new company's focus over the next several months will be on integrating operations. Stifel Research analyst Christopher Growe says the merger will save the combined company at least $1.5 billion in annual operating costs and give Kraft Heinz the ability to make more acquisitions in the future. It is also likely to make Kraft Heinz one of the most profitable food companies in the world.