Buffett is investing big in these 2 value stocks

He's never broken from his two-pronged investment strategy -- and it's prompted him to beef up on one financial stock while starting an entirely new position in another.

By StreetAuthority Jun 10, 2013 10:49AM
File photo of Warren Buffet in April 2011 (© Rick Wilking/Newscom/Reuters)By Michael Vodicka                                                    

Warren Buffett's incredible success in the stock market has been built on two principles.

The first is his long-term buy-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 to shares for the long haul without having to worry about new players disrupting the competitive landscape.

Owning stocks for the long haul has produced some of Buffett's biggest gains. Take The Washington Post Co. (WPO), 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 million investment 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 value investing, noting that the essence of value investing is buying stocks at less than their intrinsic value. This investment style has also produced huge winners for Buffett.

In 1964, American Express (AXP) became embroiled in a financial controversy after a vegetable oil company obtained huge loans 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 of credit 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 those investments were initiated decades ago, Buffett is still practicing his love of stocks with value.

Recent 13-F filings from Berkshire Hathaway (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 (WFC)
Buffett was busy loading up on shares of Wells Fargo between January and March, closing this year's first quarter with 460 million shares, up 4% from last year and his biggest holding with a 20% allocation.

Buffet has been bullish on the financial sector, and he has been making some of his biggest bets with Wells Fargo. The bank's forward P/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 in earnings 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 nice dividend that handily beats the 2.1% yield on the 10-year Treasury note.

U.S. Bancorp (USB)
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 a dividend 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 buying undervalued 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.

Michael Vodicka does not personally hold positions in any securities mentioned in this article

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19Comments
Jun 10, 2013 3:08PM
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invest in companies that can help our local economies.
Jun 10, 2013 11:06AM
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Wells Fargo is probably the best TBTF bank but like GM I'll never invest in a TBTF bailout recipient.
Jun 10, 2013 1:44PM
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user 903960, wonder what you'r using?
Jun 10, 2013 4:40PM
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Actually, Berkshire Hathaway is making a quantum leap from the 2008 investment in Goldman Sachs into a huge return on warrants that were part of the deal and they paid off in March 2013, see here:

 

With the Goldman Sachs deal done and down, the Buffett team has pivoted into a pair of banking companies that will grow with the US housing market and the re-configured credit card business.

 

I'm already on other values, and don't intend to move, but these would be a wise pair of decisions for someone with IRA or 401k dollars to lock up long term.

Jun 10, 2013 3:53PM
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Wells Fargo is by far the worst company on the face of the earth to work for because they treat their employees like $^)#. That is one of the reasons they are profitable, but the management of the company is full a bunch of dirt-balls and scum bags. And the investment division, Wells Fargo Advisors is even worse. Look up their record on FINRA Broker Check, a public web-site that allows you to check out financial firms. The section that deals with fines, penalties and wrong-doing by the firm is more than 350 pages long, most of them ending with "the firm agreed to pay a fine of $XXXX Million without admitting guilt." Never put your money in this bank, never work with one of their financial advisors, especially the bank-based advisors, because you will invarialby be twisted into an annuity or a high-priced, underperforming mutual fund that will bleed you dry.
Jun 10, 2013 6:57PM
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Not really news, Buffet's had long term investments in many of these...NBD.

Think WFC and KO are two of his long termers or biggest holdings.

Jun 10, 2013 5:21PM
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For his loyalty to Obama in 2008 Buffett was brought into the GM deal. You know that 'crony capitalism' supposedly Obama & Buffett rail against.

Jun 10, 2013 4:48PM
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@Midnight Owl. There are shady advisors all over the place. My son is a Wells Fargo Advisor. I can assure you that the great majority of their advisors are professional and honest. Warren Buffet is no dummy.
Jun 10, 2013 2:00PM
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When Warren dies he will have no more than the poorest man will have when he dies....
Jun 10, 2013 11:39AM
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The Washington Compost is nothing more than State Run Media ! I Don't read it, buy it or quote it ! Buffet is a fool to invest in this trash for an investment but I would suspect that he is using it for government favors more than an actual investment.
Jun 10, 2013 2:35PM
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Snnooooore.... hey kids, what's Warren Buffett doing? Who cares? Over 80, unbelievably rich and still too immature to venture out of the rut and live a normal life. Would he know how?
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