Warren Buffett, chairman and CEO of Berkshire Hathaway
Summary
- Undervalued stocks in the portfolio include BNY Mellon, DaVita, UPS, Wells Fargo
WFC
WFC and Globe Life
GL
GL .
Investors around the world are making the journey to Omaha, Nebraska to attend Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) annual shareholder meeting this weekend, which is being held in person for the first time in two years.
The insurance conglomerate headed by legendary guru Warren Buffett (Trades, Portfolio) and his partner Charlie Munger (Trades, Portfolio) will host the 2022 meeting on Saturday, April 30. CNBC will also be streaming the event, dubbed “the Woodstock for Capitalists,” starting at 9:45 a.m. Eastern Time.
The billionaire investor seeks a margin of safety between a company’s share price and its intrinsic value. Additionally, he advocates for buying “wonderful” companies at “fair” prices instead of fair companies at wonderful prices. Buffett also tends to favor high-quality companies that he understands and have strong moats.
After sitting on a growing cash pile throughout the Covid-19 pandemic, the Oracle of Omaha and his team have made a series of large investments in recent months, acquiring Alleghany
As such, investors may be interested in looking at some of the stocks in Berkshire’s $330.95 billion equity portfolio that are undervalued according to an earnings-based discounted cash flow model.
According to GuruFocus portfolio data, which are based on 13F filings as of Dec. 31, current positions in Berkshire’s portfolio that have a margin of safety and high predictability include Bank of New York Mellon Corp. (BK, Financial), DaVita Inc. (DVA, Financial), United Parcel Service Inc. (UPS, Financial), Wells Fargo & Co. (WFC, Financial) and Globe Life Inc. (GL, Financial).
Bank of New York Mellon
Shares of Bank of New York Mellon (BK, Financial) are trading with a 47.3% discount to their fair value of $80.79 according to the earnings-based DCF model.
The New York-based investment bank, which is currently Buffett’s 10th-largest holding, has a $34.38 billion market cap; its shares were trading around $42.61 on Thursday with a price-earnings ratio of 10.53, a price-book ratio of 0.9 and a price-sales ratio of 2.27.
The GF Value Line
The GF Value Line suggests the stock is modestly undervalued.
GuruFocus rated BNY Mellon’s financial strength 4 out of 10. Although the company has a comfortable level of interest coverage, assets are building up at a faster rate than revenue is growing, indicating it may be becoming less efficient.
The company’s profitability scored a 6 out of 10 rating despite having margins and returns on equity, assets and capital that underperform versus competitors. BNY Mellon also has a moderate Piotroski F-Score of 5 out of 9, meaning operations are typical for a stable company. Due to consistent earnings and revenue growth, it has a predictability rank of four out of five stars. According to GuruFocus research, companies with this rank return an average of 9.8% annually over a 10-year period.
Of the gurus invested in BNY Mellon, Buffett has the largest stake with 8.96% of its outstanding shares. Dodge & Cox, First Eagle Investment (Trades, Portfolio), Chris Davis (Trades, Portfolio), Hotchkis & Wiley, Bill Nygren (Trades, Portfolio) and many others also own the stock.
DaVita
DaVita (DVA, Financial) stock is trading at a 43.58% discount to its DCF fair value of $191.56.
The health care company headquartered in Denver, which provides dialysis services, has a market cap of $10.27 billion; its shares were trading around $108.08 on Thursday with a price-earnings ratio of 12.17, a price-book ratio of 13.91 and a price-sales ratio of 1.02.
According to the GF Value Line, the stock is fairly valued currently.
The GF Value Line suggests the stock is fairly valued.
DaVita’s financial strength was rated 4 out of 10 by GuruFocus. Despite having adequate interest coverage, the low Altman Z-Score of 1.49 warns the company could be at risk of bankruptcy if it does not improve its liquidity. The return on invested capital also overshadows the weighted average cost of capital, so value is being created as the company grows.
The company’s profitability fared better, scoring a 9 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers. DaVita also has a high Piotroski F-Score of 8, which implies business conditions are healthy, and steady earnings and revenue growth that contributed to a four-star predictability rank.
With a 37.66% stake, Buffett is the company’s largest guru shareholder. Other top guru investors include Larry Robbins (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Steven Cohen (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
United Parcel Service
Generating a DCF fair value of $281.90, shares of United Parcel Service (UPS, Financial) are trading with a 32.84% margin of safety.
The Atlanta-based shipping and logistics company also known as UPS has a $164.21 billion market cap; its shares were trading around $189.32 on Thursday with a price-earnings ratio of 12.84, a price-book ratio of 11.5 and a price-sales ratio of 1.69.
Based on the GF Value Line, the stock appears to be fairly valued currently.
The GF Value Line suggests the stock is fairly valued.
GuruFocus rated UPS’s financial strength 6 out of 10. In addition to a comfortable level of interest coverage, the company’s Altman Z-Score of 4.44 indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, implying good value creation is occurring.
The company’s profitability scored a 9 out of 10 rating, driven by margins and returns that outperform a majority of competitors. UPS also has a high Piotroski F-Score of 8 and, due to consistent earnings and revenue growth, a three-star predictability rank. GuruFocus data shows companies with this rank return, on average, 8.2% annually.
PRIMECAP Management (Trades, Portfolio) is UPS’s largest guru shareholder with a 0.32% stake. The T Rowe Price Equity Income Fund (Trades, Portfolio), Bill Gates (Trades, Portfolio)’ foundation trust and Simons’ firm also have significant positions in the stock.
Wells Fargo
Shares of Wells Fargo (WFC, Financial) were trading at a 30.7% discount to the fair value of $65.18.
The bank, which is headquartered in San Francisco, has a market cap of $171.23 billion; its shares were trading around $45.17 on Thursday with a price-earnings ratio of 9.38, a price-book ratio of 1.08 and a price-sales ratio of 2.32.
The GF Value Line suggests the stock is fairly valued currently.
The GF Value Line suggests the stock is fairly valued.
Wells Fargo’s financial strength was rated 3 out of 10 by GuruFocus as it is being weighed down by weak debt-related ratios.
The company’s profitability fared better with a 6 out of 10 rating, driven by margins and returns that are outperforming at least half of its industry peers as well as a high Piotroski F-Score of 7. Steady earnings and revenue growth contributed to its 4.5-star predictability rank. GuruFocus says companies with this rank return an average of 10.6% annually.
Of the gurus invested in Wells Fargo, Dodge & Cox has the largest stake with 3.52% of outstanding shares. PRIMECAP Management (Trades, Portfolio), Davis, Hotchkis & Wiley, Richard Pzena (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, the T. Rowe Price Equity Income Fund and Grantham, among others, also have significant positions in the stock.
Globe Life
Globe Life (GL, Financial) is trading at a 26.93% discount to its DCF fair value of $139.30.
The McKinney, Texas-based insurance company, which provides health and life insurance products, has a $10.10 billion market cap; its shares were trading around $101.79 on Thursday with a price-earnings ratio of 14.22, a price-book ratio of 1.17 and a price-sales ratio of 2.02.
According to the GF Value Line, the stock is fairly valued currently.
The GF Value Line suggests the stock is fairly valued.
GuruFocus rated Globe Life’s financial strength 5 out of 10. Although the company has issued new long-term debt in recent years, it is at a manageable level due to sufficient interest coverage. The WACC also exceeds the ROIC, so the insurer is struggling to create value.
The company’s profitability scored an 8 out of 10 rating as its margins and returns are overall outperforming versus competitors. Globe Life also has a moderate Piotroski F-Score of 5, while consistent earnings and revenue growth contributed to a five-star predictability rank. GuruFocus found companies with this rank return an annual average of 12.1%.
Buffett is the company’s largest guru shareholder with a 6.41% stake. Pzena, Ken Fisher (Trades, Portfolio), Dalio and Jones also own Globe Life.
Other undervalued holdings
Additional holdings in Buffett’s 44-stock equity portfolio as of the end of fourth-quarter 2021 that are undervalued currently are U.S. Bancorp
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include the positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Source: https://www.forbes.com/sites/gurufocus/2022/04/29/5-undervalued-buffett-stocks-ahead-of-annual-meeting/