Warren Buffett Top 5 Picks to Buy Now

Warren Buffett is known as the “Oracle of Omaha” for a reason, he’s the most successful investor in history. Currently, he’s ranked third on the Forbes top 20 billionaire’s list with a net worth of $84 billion. He is the son of a former congressman and bought his first stock at the age of 11. In this report, we’re going to look at the history of Warren Buffett and Berkshire Hathaway, review his investment philosophy and analyze 5 of Berkshire’s top holdings and recent additions for some of the best value opportunities in the market.

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  • History

    Warren Buffett is known as a student of Benjamin Graham, the father of value investing. He was a student of Graham’s while attending college at Columbia, and then worked for Graham- Newman after he graduated as an investment salesman. Buffett worked for Graham until his retirement and then started a partnership with close friends and family. Buffett applied the value principles that he learned from Graham when he began investing in Berkshire Hathaway, a textile company, in 1962. After realizing that the company needed a change in management, he began purchasing more shares.

    After acquiring Berkshire Hathaway, Buffett used the company as a holding company to buy National Indemnity Company and then used its cash flow to finance other acquisitions. Buffett is currently the chairman and CEO of Berkshire Hathaway, which has ownership interest in 46 different companies with a total value of nearly $190 billion.

    Investment Philosophy

    Buffett’s investment philosophy centers on three basic tenets: look at the stock as a business, use the market’s fluctuations to your advantage and seek a margin of safety. He will not invest in businesses that he doesn’t understand and won’t consider companies that haven’t been around for 10 years. He feels that a company that offers a quality product at a good price with an honest, reliable management is a good company.

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  • Buffett also coined the term, “economic moat.” This concept has gained more broad-based appeal since it was endorsed by him and conjures up imagery moats that were built to protect castles from their enemies. The idea is to look for companies that have a durable competitive advantage. The advantage could be based on the ability to produce at a lower cost than their competitors, a strong brand, barriers to entry, recurring revenue streams, network effects, etc.

    Portfolio Sector Weightings

    In Figure 1 below, you’ll see a break-down of Berkshire Hathaway’s portfolio allocation by sector. They are heavily invested in the financial services, technology and consumer defensive sectors. The 41 percent weighting to financial services makes sense given

    Berkshire’s history of using cash flow from one business to invest in other businesses. GEICO is a financial holding of Berkshire and has been profitable in every year since 2000 and has generated significant cash flows for their portfolio managers to invest.

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    Figure 1—Berkshire Hathaway’s Portfolio Sector Weightings—Source: Guru Focus

    Top 5 Holdings

    Berkshire’s holdings of publicly traded stock doesn’t necessarily look all that unique. They are some of the biggest corporate names out there. Their top 5 holdings as of March 31, 2018 (see Figure 2) are Apple Inc. (AAPL) at 22.27%, Wells Fargo & Co. (WFC) at 12.66%, Bank of America Corporation (BAC) at 10.78%, The Kraft Heinz Co. (KHC) at 10.74% and Coca-Cola Co. (KO) at 9.19%.

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    Figure 2—Berkshire Hathaway’s Top 5 Holdings as of 3/31/18—Source: Guru Focus

    Stocks Added to Portfolio in Last Year

    So far in 2018 there have been no additions to Berkshire’s portfolio, but between the June 30, 2017 report until the December 31, 2017 report there were four stocks added (see Figure 3). In the June 30 report, they reported a new position in Store Capital Corporation (STOR) and Synchrony Financial (SYF). In their September 30, 2017 report they added Bank of America Corporation (BAC), and in the December 31, 2017 report they added Teva Pharmaceuticals (TEVA).

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    Figure 3—Stocks Added to Portfolio in 2017

    2018 Portfolio Changes

    In their march 31, 2018 report (see Figure 4), Berkshire reported adding to positions in Apple Inc. (AAPL), Bank of New York Mellon (BK), Delta Airlines Inc. (DAL), Monsanto Company (MON), Teva Pharmaceuticals (TEVA) and U.S. Bancorp (USB). Their positions were reduced in Charter Communications Inc. (CHTR), Liberty Global PLC (LBTYA), Phillips 66 (PSX), United Continental Holdings (UAL), Verisk Analytics Inc. (VRSK) and Wells Fargo & Company (WFC). Their entire holdings in Graham Holdings Company (GHM) and International Business Machines Corporation (IBM) were sold.

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    Figure 4—Portfolio Changes 2018 as of March 31, 2018

    There are four companies that Berkshire has consistently added to their position in the last several quarters. They are Monsanto Company (MON)—which was recently acquired by Bayer for $66 billion— Apple Inc. (AAPL), Bank of New York Mellon (BK) and U.S. Bancorp (USB).

    Top 5 Picks

    Now that we have an understanding of how Warren Buffett invests and some of the companies he’s invested in, let’s look at some of the opportunities right now to invest in. Here are the top five trading opportunities from the portfolio of Berkshire Hathaway.

    1. Apple Inc. (AAPL)

    Price:$185.10
    Dividend Yield: 1.57%
    Market Cap: $911.56 billion
    Enterprise Value: $945.46 billion

    Business Summary

    Apple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers to consumers, and small and mid-sized businesses; and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications.
    Apple Inc. was founded in 1977 and is headquartered in Cupertino, California.

    Earnings & Revenue History

    In the last 5 quarters AAPL has beaten both the top line revenue estimates and the bottom line earnings estimates. In the most recent quarter it saw year-over year revenue and earnings growth and has a five-year projected earnings growth rate of 13.76%. AAPL has grown their earnings in the last 5 years at a 6.36% annual growth rate and grew revenue at a 7.93% growth rate. The earnings growth rate is well below the industry average of 13.10% and the sector average growth rate of 11.84%. However, revenues have grown at a much faster pace than the industry at 3.57% and sector at 5.08%.

    Valuation Ratios

    Price-to-Earnings (P/E): 17.90
    Price-to-Book (P/B): 7.23
    Enterprise Value to EBITDA (EV/EBITDA): 11.60

    The current P/E ratio for AAPL is 17.90, which is slightly higher than the median P/E of 15.4 over the last 10 years and is lower than the median value of 21.22 for the companies in the consumer electronics industry. Its current P/B is higher than its 10-year median value of 5.19, which is higher than the median value of 1.93 for the companies in its industry. The EV/EBITDA is slightly above the median value of 9.8 but is slightly below the industry median of 12.27. On a relative basis compared to its own history and the current values of the industry, AAPL’s valuation ratios better than its own history and pretty close to the median value for the industry.

    Profitability and Growth

    Return on Equity (ROE): 39.93%
    Return on Assets (ROA): 14.57%
    Return on Capital (ROC): 223.97%
    3-year Revenue Growth Rate:13.50%
    3-year EBITDA Growth Rate: 13%

    The current value for ROE is above the 10-year median value of 36.08% but is higher than 96% of its industry with a median value of 6.95. Its ROA is below its 10-year median value of 19.79 but is higher than 93% of the industry with a median value of 3.44%. Its ROC is lower than its 10-year median value of 364.21 but is significantly higher than the industry median of 12.37. AAPLs 3-year growth rates are close to the median value for the past 10-years but is significantly higher than the industry.

    While AAPLs numbers for profitability and growth don’t necessarily jump off the page when compared to itself historically, when compared to its industry it does really well.

    Price Performance

    The 52-week change for AAPL is 27.50% with the 52-week high at $194.20 and its 52-week low at $142.28. The beta for AAPL is slightly higher than the S&P 500 at 1.15 and its 3-month average volume is 29.73 million.

    AAPL is currently trading above both its 50-day and 200-dow simple moving averages. Both averages are rising, which indicative of an intermediate term and long-term uptrend. The price has experienced recent weakness as it has neared the 50-day at $183, but in the past four days has held on to its previous low around 185.41. If that level is broken, the price’s next levels of support come at around $179 and then $168. As a value-oriented investor, the lower price and higher yield improves the long-term prospects of an investment, all things being equal.

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    2. DaVita Inc. (DVA)

    Price: $72.43
    Dividend Yield: N/A
    Market Cap: $12.63 billion
    Enterprise Value: $21.93 billion

    Business Summary

    DaVita Inc. provides kidney dialysis services for patients suffering from chronic kidney failure or end stage renal disease (ESRD). The company operates kidney dialysis centers and provides related lab services in outpatient dialysis centers. It also provides outpatient, hospital inpatient, and home-based hemodialysis services; owns clinical laboratories that provide routine laboratory tests for dialysis and other physician-prescribed laboratory tests for ESRD patients; and management and administrative services to outpatient dialysis centers. In addition, the company operates DaVita Rx, a pharmacy that provides oral medications and medication management services to patients with ESRD; disease management services; vascular access services; clinical research programs; physician services; and direct primary care services. The company was formerly known as DaVita HealthCare Partners Inc. and changed its name to DaVita Inc. in September 2016. DaVita Inc. was founded in 1994 and is headquartered in Denver, Colorado.

    Earnings & Revenue History

    In the last 5 quarters DVA has beaten both the top line revenue estimates and the bottom line earnings estimates. In the most recent quarter it saw year-over year earnings growth, but revenues fell. It has a five-year projected earnings growth rate of 23%. DVA has grown their earnings in the last 5 years at a 4.64% annual growth rate and grew revenue at a 5.85% growth rate. The earnings growth rate is well below the industry average of 7.31% and the sector average growth rate of 8.04%. However, revenues have also grown at a slower rate than the industry at 13.76% and sector at 7.89%.

    Valuation Ratios

    Price-to-Earnings (P/E): 33.98
    Price-to-Book (P/B): 2.83
    Enterprise Value to EBITDA (EV/EBITDA): 14.68

    The current P/E ratio for DVA is 33.98, which is almost double the median P/E of 18.4 over the last 10 years and is greater than the median P/E of 27.31 for the Medical Care industry. Its current P/B is lower than its 10-year median value of 3.11, which is close to the industry median of 2.64. The EV/EBITDA is higher the median value of 9.2 but is below the industry median of 15.23.

    On a relative basis compared to its own history and the current values of the industry, DVAs valuation ratios are mixed.

    Profitability and Growth

    Return on Equity (ROE): 8.13%
    Return on Assets (ROA): 2.06%
    Return on Capital (ROC): 14.65%
    3-year Revenue Growth Rate: -1.20%
    3-year EBITDA Growth Rate: 8.60%

    The current value for ROE is below the 10-year median value of 18.33% but is slightly higher than the industry median value of 8.03%. Its ROA is below its 10-year median value of 4.51 and is lower than the industry median value of 3.48%. Its ROC is lower than its 10-year median value of 63.2% but is slightly lower than the industry median of 14.91%. DVAs 3-year growth rates are below median value for the past 10-years and is below the industry for revenue growth and above it for EBITDA growth.

    DVA has seen the top-line revenue growth and bottom line earnings growth slow quite a bit. The history is part of the picture, but the current analyst projections suggest that the growth may again pick up in the next 5 years.

    Price Performance

    The 52-week change for DVA is 10.77% with the 52-week high at $80.71 and its 52-week low at $52.51. DVA is fairly volatile stock with a beta at 1.44 and its 3-month average volume is 1.57 million.

    DVA saw it’s 50-day moving average cross over its 200-day moving average on Jun 15, 2018 which is indicating a resumption of its long-term uptrend. The large gap in December 2017 could potentially be a breakout from a longer-term bull flag pattern and may be another indication of a long-term uptrend.

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    3. Verisign, Inc. (VRSN)

    Price: $139.50
    Dividend Yield: N/A
    Market Cap:$17.17 billion
    Enterprise Value :$17.23 billion

    Business Summary

    VeriSign, Inc. provides domain name registry services and Internet security worldwide. The company offers registry services that operate the authoritative directory of .com, .net, .cc, .tv,.gov, .jobs, .edu, .name, and other domain names. Its registry services allow individuals and organizations to establish their online identities. The company also provides infrastructure assurance services, including distributed denial of service protection and managed domain name system services. It serves financial institutions, software-as-a-service providers, e- commerce providers, and media companies through direct sales and indirect channels. The company was founded in 1995 and is headquartered in Reston, Virginia.

    Earnings & Revenue History

    In the last 5 quarters VRSN has beaten both the top line revenue estimates and the bottom line earnings estimates. In the most recent quarter it saw year-over year earnings and revenue growth. DVA has grown their earnings in the last 5 years at a 14.52% annual growth rate and grew revenue at a 5.93% growth rate. The earnings growth rate is above the industry average of 8.57% but below the sector average growth rate of 17%. Revenues have grown at a faster rate than the sector at 5.09%% but below the industry at 7.88%.

    Valuation Ratios

    Price-to-Earnings (P/E): 36.33
    Price-to-Book (P/B): N/A
    Enterprise Value to EBITDA (EV/EBITDA): 21.51

    The current P/E ratio for VRSN is 36.33, which is above the median P/E of 24.7 over the last 10 years and is slightly higher than the median P/E of 33.49 for the Internet Content & Information industry. The EV/EBITDA is higher than the median value of 14.6 and is higher than the industry median of 18.26. The book value cannot be calculated because of the negative equity on the balance sheet.

    On a relative basis compared to its own history and the current values of the industry, VRSNs valuation ratios are moderately high.

    Profitability and Growth

    Return on Equity (ROE): N/A
    Return on Assets (ROA): 17.71%
    Return on Capital (ROC): 286.9%
    3-year Revenue Growth Rate: 9.4%
    3-year EBITDA Growth Rate: 12.10%

    The current value for ROE cannot be calculated because of negative equity on the balance sheet. Its ROA is below its 10-year median value of 16.83% and is significantly higher than the industry median value of 2.54%. Its ROC is higher than its 10-year median value of 148.95% and higher than the industry median of 34.22%. DVAs 3-year growth rates are slightly below the median values for the past 10-years and is below the industry for revenue growth and above it for EBITDA growth.

    While the ROE can’t be calculated, it posts higher returns on ROA and ROC. For example, ROA strips out the leverage through debt and will be equal to or less than ROE.

    Price Performance

    The 52-week change for VRSN is 50.04% with the 52-week high at $145.57 and its 52-week low at $92.13. DVA is considered a low beta stock with a beta of 0.75 and its 3-month average volume is 1.07 million.

    VRSN has performed extraordinarily well so far in 2018. It broke out of a month-long consolidation in late May to run nearly $30. The price is well above the uptrending 50-day and 200-day moving averages and is currently pulling back.

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    4. The Kraft Heinz Company (KHC)

    Price: $63.18
    Dividend Yield: 3.97%
    Market Cap: $77.03 billion
    Enterprise Value: $107.74 billion

    Business Summary

    The Kraft Heinz Company manufactures and markets food and beverage products in the United States, Canada, Europe, and internationally. Its products include condiments and sauces, cheese and dairy products, meals, meats, refreshment beverages, coffee, and other grocery products. The company was formerly known as H.J. Heinz Holding Corporation and changed its name to The Kraft Heinz Company in July 2015. The Kraft Heinz Company was founded in 1869 and is headquartered in Pittsburgh, Pennsylvania.

    Earnings & Revenue History

    In the last 5 quarters KHC has beaten both the top line revenue estimates and the bottom line earnings estimates. In the most recent quarter it saw year-over year earnings growth, but a slight decrease in revenue growth. The current 5-year projected growth rate of earnings is 6.95%. There are no 5-year historical growth numbers because the company was brought public again in July of 2015.

    Valuation Ratios

    Price-to-Earnings (P/E): 6.99
    Price-to-Book (P/B): 1.16
    Enterprise Value to EBITDA (EV/EBITDA): 13.84

    The current P/E ratio for DVA is 6.99, which is below the median P/E of 32.17 over the last 10 years and well below the median P/E of 20.69 for the Packaged Foods industry. The P/B is well below the median P/B of 1.74 and is below the median value of the industry at 1.70. The EV/EBITDA is lower than the median value of 18.9 and is higher than the industry median of 12.61.

    On a relative basis compared to its own history and the current values of the industry, KHC is trading at a fairly discounted value.

    Profitability and Growth

    Return on Equity (ROE): 18.07
    Return on Assets (ROA): 9.23%
    Return on Capital (ROC): 97.24%
    3-year Revenue Growth Rate: -11.10%
    3-year EBITDA Growth Rate: 18.60%

    The current value for ROE is slightly above its historical median value of 17.83% but is significantly above the median value for the packaged foods industry at 8.32%. Its ROA is above its 10-year median value of 7.34% and is significantly higher than the industry median value of 3.80%. Its ROC is higher than its 10-year median value of 93.22% and higher than the industry median of 12.67%. DVAs 3-year revenue growth rate is below the median values for the past 10-years and below the industry. Its 3-year EBITDA growth rate is higher than its median value and the industry median value.

    While revenues have been falling, the company has become more profitable and has a fairly strong ROE, ROA and ROC.

    Price Performance

    The 52-week change for KHC is -29.78% with the 52-week high at $90.38 and its 52-week low at $54.11. KHC is considered a low beta stock with a beta of 0.78 and its 3-month average volume is 5.48 million.

    It’s been a difficult year KHC as its price has depreciated significantly. That performance has also dovetailed with the Consumer Staples sector as well. However, recently the stock has formed a higher high and a higher low as it broke above the 50-day moving average. As a result, the 50-day is starting to turn higher. The price is still well below the 200-day, but with long- term U.S. Treasury starting to fall, it may make the higher dividend yield become more attractive along with the valuation.

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    5. Proctor & Gamble Co. (PG)

    Price: $77.36
    Dividend Yield: 3.78%
    Market Cap: $194.53 billion
    Enterprise Value: $215.90 billion

    Business Summary
    The Procter & Gamble Company provides branded consumer packaged goods to consumers in the United States, Canada, Puerto Rico, Europe, the Asia Pacific, Greater China, Latin America, India, the Middle East, and Africa. The company sells its products through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores, and pharmacies. The Procter & Gamble Company was founded in 1837 and is based in Cincinnati, Ohio.

    Earnings & Revenue History

    In the last 5 quarters PG has beaten both the top line revenue estimates and the bottom line earnings estimates. In the most recent quarter its seen both year-over year earnings and revenue growth. The current 5-year projected growth rate of earnings is 6.89%, and the company has an annual earnings growth rate in the last 5 years of 3.42%. The historical earnings growth rate is below the industry at 9.50% and the sector at 7.12%

    Valuation Ratios

    Price-to-Earnings (P/E): 20.53
    Price-to-Book (P/B): 3.64
    Enterprise Value to EBITDA (EV/EBITDA): 12.51
    3-year EBITDA Growth Rate: 0.30%

    The current P/E ratio for KHC is 20.53, which is above the median P/E of 19.25 over the last 10 years and in-line with the median P/E of 20.69 for the Household and Personal Products industry. The P/B is above the median P/B of 3.17 and is above the median value of the industry at 1.70. The EV/EBITDA is lower than the median value of 13.65 and lower than the industry median of 12.61.

    On a relative basis compared to its own history and the current values of the industry, PG is trading near its median valuation over the past 10 years. Given the fairly high valuation for the market as a whole, that may look attractive given the high dividend yield.

    Profitability and Growth
    Return on Equity (ROE): 18.02
    Return on Assets (ROA): 8.23%
    Return on Capital (ROC): 71.84%
    3-year Revenue Growth Rate: -2.5%
    3-year EBITDA Growth Rate: 0.30%

    The current value for ROE is slightly above its historical median value of 17.3% but is significantly above the median value for the Household and Personal Products industry at 8.32%. Its ROA is slightly below its 10-year median value of 8.23% and is significantly higher than the industry median value of 3.80%. Its ROC is higher than its 10-year median value of 68.24% and higher than the industry median of 12.67%. DVAs 3-year revenue growth rate is below the median values for the past 10-years and below the industry. Its 3-year EBITDA growth rate is lower than its median value and the industry median value.

    While revenues have been falling, the company has maintained profitability and has a fairly strong ROE, ROA and ROC.

    Price Performance
    The 52-week change for PG is -14.14% with the 52-week high at $94.67 and its 52-week low at $70.73. PG is considered a low beta stock with a beta of 0.39 and its 3-month average volume is 9.46 million.

    Like much of the Consumer Non-Cyclical sector, PG has traded significantly lower in 2018 and even had a large gap following its earnings in April. The price has begun to rebound since the beginning of May and has recently had some higher volume up-days. The recent strength has carried it above the 50-day moving average, but the average is still declining. The 200-day moving average is still well above the price and is still reflecting a long-term downtrend.

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    Conclusion

    As a value investor, it can be a difficult time right now to find value when statistically the market is trading at or near historically high valuations in most categories. Seeing a degree of consistency, improving metrics or a strong brand may help a company expand its valuation above its industry and above its historical values.

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