5 Stocks the Value Greats Love

In 1993, Money World asked Warren Buffet what advice he'd give a new investment manager. "I'd tell him to do exactly what I did 40-odd years ago," Buffett said, "which is to learn about every company in the United States that has publically traded securities."

The interviewer interrupted. "But there's 27,000 public companies."

"Well," Buffett replied, "start with the A's."

Impressive, but completely impractical for most of us. Rather than starting with the A's, mimicking the masters might be a more realistic approach. Find out what the best value investors are up to. Steal your ideas from them. Then dig a little deeper.

With the hedge fund tracking tool AlphaClone, that's what I set out to do. I used a composite index of 18 of some of the world's value investing greats -- including David Einhorn, Eddie Lampert, and David Tepper -- to find the 5 most popular value stocks. In order, here's what I found:

1. Apple (Nasdaq: AAPL  )
Apple gets the oxymoron award for being one of the most loved companies on the planet, as well as the most widely held investment among value managers who strive to buy what others shun. This isn't as crazy as it sounds: Apple's cult-like popularity simply hasn't carried over to its share price. Just look at the numbers. The company trades at roughly 16 times forward earnings estimates. Cash on its balance sheet equals roughly 10% of its market cap. Hard to call that anything but cheap, despite how adored and hyped this company is. Several Fools recently said the same thing about Google (Nasdaq: GOOG  ) .

2. JPMorgan Chase (NYSE: JPM  )
With U.S. financial reform signed and sealed and international Basel III regulations completed, big banks aren't quite the swamps of uncertainty they were a year ago. And as (arguably) the most sensibly managed and conservatively run big bank, JPMorgan Chase seems the most likely to resume paying out normalized dividends in the near future.

3. Citigroup (NYSE: C  )
I have a hard time getting on board with Citigroup. The same flaw that nearly took it down in 2008 -- a lack of direction -- still exists. It seems to be selling every asset it can in a frantic attempt to become smaller, niche be damned.

But if you don't buy that argument and think CEO Vikram Pandit is steering this ship in the right direction, I can see why you might find Citigroup attractive. It has raised a lot of capital, and by some metrics is the most heavily capitalized of any of the big banks. You could also call it cheap, trading at 0.77 times book value. If Citigroup manages to iron out a few of its managerial flaws, the upside could be great.

4. Pfizer (NYSE: PFE  )
Pfizer is in the same miserable boat most brand-name pharma companies are in: Patents expire, and when the do, generics steal the show. It's ugly. But as depressing as the future of Big Pharma might be -- and it's probably not as bad as most fear -- the important question is how bad will it get in relation to current valuations. And when you look at a company like Pfizer, the answer isn't that scary. Take a look at four-year analyst earnings estimates:

Year

2011

2012

2013

2014

EPS Estimate

$2.27

$2.26

$2.27

$2.40

Source: Capital IQ, a division of Standard & Poor's.

Yes, growth is pretty much toast. But how much growth do you need with a $17 stock and consistent earnings over $2 per share? Not much. And with a 4.2% dividend that's conservatively supported by current cash flow, you're being paid to wait.

5. Hewlett-Packard (NYSE: HPQ  )
HP's a mess. Its old CEO misrepresented a few thousand bucks worth of expenses. The board canned him with a severance package worth tens of millions. He quickly joined the ranks of one of the company's biggest competitors. It's a managerial catastrophe, and few investors want much to do with it. But that's exactly when things get exciting for value investors who look past the smoke. HP trades at just over 10 times last year's free cash flow, and is still expected to grow nearly 10% per year over the next five years. There's room for error -- be it managerial or otherwise -- when a stock's priced that cheap.

Disagree? Got more to add? Sound off in the comments section below.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Google and Pfizer are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 04, 2010, at 5:04 PM, plange01 wrote:

    you can drop hp this company is a train wreck!appl is a great company but its stock is at a ridiculous level.citi needs to unload their ceo pandit a failed hedge(trash) fund manager who has not been able to move its stock.pfizer has been stuck in a rut for years and shows no sign of going anywhere.jpm looks pretty good its stock about $10 to high for me to buy though....

  • Report this Comment On October 04, 2010, at 5:57 PM, evelynel wrote:

    I am not knowledgeable but would like to understand how your predictions work?? How often are you right? it appears as though Motley Fool as a group, hides behind its "blog" or "investors" but never assumes responsibility for its recommendations./ We receive daily correspondence to sell us additional services that's about it.... Any explanations??

  • Report this Comment On October 04, 2010, at 6:02 PM, TMFHousel wrote:

    evelynel,

    The historical performance for all of TMF's paid services are listed clearly on the home page (middle left).

  • Report this Comment On October 04, 2010, at 7:34 PM, kartha1 wrote:

    Of course, past performance is no guarantee of future!

  • Report this Comment On October 04, 2010, at 8:51 PM, Alg0rhythm wrote:

    Really dull. The picks are Apple... I heard Iphone and Mac do okay, Morgan-Chase and Citigroup... well the government doesn't let them fail, and they have access to trillions in free money from the Fed... Pfizer.. boringly consistent... will not fall over and die anytime soon and HP, same.

    Where's the good stuff, hot fresh and juicy... the little innovators, the new ideas?

    Right over here.

    I'm raising 10 million for craziest, most colorful layer on the oldest, most recession proof of business models, real estate, and I am going to offer room and board as part of a comp package to people who work a venue, and storefronts. Part of the living quarters are reserved for local artists and musicians who get in after a lengthy audition period, after all their friends have had a chance to log into our site and vote.

    I'm going to install venue control software that can be controlled from a phone, and integrated into regular house holds

    Something we can do again, and again, and again.

    I'm going to make it the most energy self-sufficient place on the planet, write off the expenses as R&D and use the PR to launch our own line of green energy products. That's the first 5 million.

    I

    The second 5 million is a B2B and B2C call center, for outsourced marketing of financial and green technology products, aimed at sales yes, but mapping the the nation 2. Obviously, with the B2C, the numbers will be too high to get everybody, but at least get a feel for all of the zip codes, so when we come back with our own product, we come back strong, and with knowledge of various areas and who's who.

    I'm going to payback 20 million in two years in return for the 10. I only want ownership as a part of sweat equity.

    That's interesting

  • Report this Comment On October 04, 2010, at 10:41 PM, Glycomix wrote:

    I don't know if these are all values, but they're all probably good investments.

  • Report this Comment On October 05, 2010, at 4:51 AM, ryanalexanderson wrote:

    Hey Alg0rhythm. Man, I'd love to come over to your iPhone-controlled environmentally awesome house full of artists and discuss e-business ideas while presumably working our way slowly through a big bag o' hooch...but no, I think I'll stick with dividend-payers for the moment when it comes to investing.

    Thanks for the circa-1998 San Francisco nostalgia, though. Those were good times!

  • Report this Comment On October 05, 2010, at 1:41 PM, Glycomix wrote:

    Alg0rhythm,

    I got it! You're recruiting someone to run your mini-warehouse business?

    You're giving room and board to people who have no pressing deadlines (artists and musicians) and mention zipcodes (different areas) and software controllers (to open gates?)

    Will those software controllers turn on webcams to let us look at our stuff in your mini-warehouse to see if anyone has taken anything? That would be a lot quicker than having to go down there and check in person.

  • Report this Comment On October 05, 2010, at 9:11 PM, garno53 wrote:

    HP is alive and well,trading at a Great price.They have "tempoary managerial problems (politics without a doubt),but an opportunity for the investors..they are well positioned in the Laptop Market..since desktops are out..inovation..I think so..the future will be as solid ,if not more than the PAST.

  • Report this Comment On October 05, 2010, at 11:44 PM, CHIQUIS7 wrote:

    do you have any 1Y-2Y forecast in regards to C and MSFT?, I hold both stocks since a year ago. I started today with SA services.

  • Report this Comment On October 06, 2010, at 11:31 AM, Alg0rhythm wrote:

    No.. I thought more like setting up teams with goals, deadlines and a required amount of hours, and competitions..signing the artists up to a multi-year contracts, and have a booking agent keep them playing out twice a week, in at least once, with at least+ recording sessions. Same thing with visual artists and designers.. scheduled amount of output with some leeway for the creative mind. Busy people with places to live and food to eat steal rarely, and you boot out anyone not about gettin it done. Cameras most definitely, always on in the hallways for security, and ones that can be switched on and off in the other rooms... constant content generation that just has to be filtered. Can we say reality tv?

    The way the technology is now, you could film segments on handhelds... generating buzz for the brand of handheld.

    Thanks for the San Fran tip...it might be better to aim for a proper West Coast launch to give time for deals to get prospected and developed, and in the mean time develop the events process and a core group of personnel.

    Isn't hooch moonshine?

  • Report this Comment On October 06, 2010, at 11:31 AM, Alg0rhythm wrote:

    Not the right audience, my bad.

  • Report this Comment On October 08, 2010, at 6:29 PM, Bonefish100 wrote:

    Hey, Alg0rhythm. Takes me back to when I was young and full of ideas in the 60's. I wish you well with your artists and musicians. However, if I hear the word's "green energy" again I'm gonna vomit. Most of the "green" products field is a scam and much of it is over-priced and over-rated. This includes the greatest ripoff ever called carbon credits. Oh, and I used to be in the toxic waste destruction business using "efficient, green" technology. And I play the blues guitar, so don't accuse me of being out of touch or too old to be relevant.

  • Report this Comment On October 11, 2010, at 11:15 AM, lazytype wrote:

    "Find out what the best value investors are up to. Steal your ideas from them."

    What if they did the same and steal ideas from one another, who's doing the actual research? ROTFL. Good luck Mr. Lazy :)

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