5 Stocks That Would Make Buffett Greedy

"Be fearful when others are greedy, and greedy when others are fearful."
-- Warren Buffett

That is classic Buffett. Vintage, classic, timeless Buffett. A quote for all investors to truly live by.

Unfortunately, the simplicity of the quote belies the oftentimes excruciating difficulty that comes with actually following what it says. The reason is simple: The stock market is, well, a market and so there are always buyers and sellers, bulls and bears. So if you look hard enough, you can always find other investors that appear to be either greedy or fearful.

For your consideration
I recently took on fellow Fool Anders Bylund in a Foolish battle to the death over Netflix (Nasdaq: NFLX  ) . On one of my bear-side articles, a reader paraphrased Buffett's famous quote, suggesting that it was time to get greedy with Netflix because I was painting a fearful picture.

To be sure, I am fearful about Netflix's stock. Though the folks at Motley Fool Stock Advisor don't agree with me on this one (Netflix is a longtime rec), the stock's current valuation is the kind of thing that could give me nightmares as a shareholder. That's just what I think, though. Is the entire market fearful about Netflix's stock? That's more important because it's only then that Buffett's quip really applies.

I'd argue that the market is anything but fearful about Netflix's stock -- the stock has more than doubled over the past year and currently trades at more than 50 times 2011 earnings estimates. In fact, it seems to me that, if anything, we should be fearful over the apparent greed that's driving Netflix's stock.

Tunnel vision
As humans, we are unfortunately preprogrammed in such a way that we can fall victim to quite a number of cognitive biases. As investors, unless we are aware of these biases and keep close tabs on where they might crop up, we may find them pushing us into terrible investing decisions.

Consider the hostile media effect. In a study at Stanford University, a group of pro-Palestinian and pro-Israeli students were each shown a collection of identical news clips about events during the Lebanese Civil War. Researchers found that both sides came away with the impression that the news clips were biased against their side and were saying favorable things about the opposition.

Personally, I see this effect crop up every football season when my dad and I watch Penn State football games. No matter who's commentating or where the game is taking place, we inevitably spend half of the game griping about how the commentators obviously hate Penn State.

While the latter example may be a bit silly, the hostile media effect is anything but, if it creeps into our investing. Even a small dose of this and suddenly we start to view all of the coverage about a particular stock that we own as overly bearish. And what happens next?

"Obviously," we wisely conclude, "the market is fearful of this stock, and so following the good Mr. Buffett's advice, it's time for me to get greedy!"

If the "fear" permeating the market ends up being a figment of your imagination, you can easily see how your investment may not end well.

So when are markets actually fearful?
Call me a simpleton, but I prefer to take a very straight-forward approach here. In short, if a stock's price is falling and/or it has a low valuation, the market is fearful. End of story.

This doesn't mean that every stock whose price is falling and that carries a low price-to-earnings multiple is worth backing up the truck for. Many stocks that exhibit those factors are getting throttled for good reason. But that's not always the case. Or, at least, in some cases the market's fear has significantly overshot the situation and left the stock cheap.

Why am I so convinced that Buffett would back me up on this view of his quote? The last time (to my knowledge) that he used it in a significant way was in his October 2008 editorial in The New York Times. He wrote:

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

And we could most certainly see that fear demonstrated through my two simple checks. Between Oct. 16, 2007, and Oct. 16, 2008 (the date of the editorial), the S&P 500 lost 38%. Meanwhile, Robert Shiller's long-term S&P valuation multiple had fallen from nearly 28 in May of 2007 to 16.4 in October of 2008.

Where's the fear today?
It's a bit more challenging to find fear in the market today as compared to October 2008. The S&P 500 has nearly doubled since its early 2009 low and the Shiller valuation measure that I mentioned above has climbed back to 23.4. Many stocks have vastly outperformed the S&P and particular areas of the market -- for instance small caps broadly -- are looking a bit greedy to me.

However, if you look closely enough it's definitely possible to find stocks showing signs of investor fear.

Company

Year-Over-Year Price Change

Forward Price-to-Earnings Multiple

Western Digital (NYSE: WDC  ) (6.2%) 10.9
Teva Pharmaceutical Industries (Nasdaq: TEVA  ) (19.9%) 9.1
SUPERVALU (NYSE: SVU  ) (29.2%) 8.7
Best Buy (NYSE: BBY  ) (29.7%) 9.1
Cisco (Nasdaq: CSCO  ) (34.2%) 10.6

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

To be clear, the information above is not enough to make an investment. While I like to hunt for stocks among those that Mr. Market is currently afraid of, as I noted above, it's important to figure out whether the fear has actually created a good buying opportunity.

That said, looking at the list above, I think we may have a handful of stocks that have been victims of a fearful overreaction. When it comes to Best Buy, I'm with my fellow Fool Anand Chokkavelu -- I'm not particularly bullish on its long-term prospects, but I do think the beating it's taken recently has ignored the current (profitable) realities of the company. I think Western Digital falls in a similar class. Though it also faces significant long-term challenges, I think it could be a good performer for the shorter run.

As for the other three, I think there could be longer-term opportunity available. There are definitely substantive concerns for all of them -- Cisco's growth and competitive position, SUPERVALU's balance sheet, Teva's proprietary drugs -- but I think investors have overshot those concerns and left these stocks with attractive valuations.

If you want to take a closer look at the group above, a good start is adding them to your Foolish watchlist. You can add any of the stocks in this article by clicking the "+" next to it, or you can click here to get started.

Best Buy is a Motley Fool Inside Value recommendation. Best Buy and Netflix are Motley Fool Stock Advisor picks. Teva Pharmaceutical Industries is a Motley Fool Global Gains recommendation. The Fool has created a bull call spread position on Cisco Systems. Alpha Newsletter Account, LLC has bought puts on Netflix. Motley Fool Options has recommended buying calls on SUPERVALU. The Fool owns shares of Best Buy, SUPERVALU, Teva Pharmaceutical Industries, and Western Digital. Alpha Newsletter Account, LLC owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (10) | Recommend This Article (55)

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 May 09, 2011, at 5:47 PM, TheDumbMoney wrote:

    TEVA is finally starting to look attractive just on a free cash flow basis, not wildly undervalued, but attractive, and very attractive if it goes under $45. They're going to lose Copaxone at just about the time that half the major drugs in the world (so it seems) go generic. It's amusing to me that all of the major pharmas are falling all over themselves to get into the generics business, and meanwhile TEVA, the biggest make of generics, is buying Cephalon and moving more into non-generics. I'm not sure what this says about the industry, but there certainly does seem to be a 'grass-is-greener' attitude at work on both sides. TEVA knows margins are better on non-generics, but maybe the established pharmas know that it will be harder and harder to get any new drugs approved, or even to discover them. Food for thought.

  • Report this Comment On May 09, 2011, at 6:06 PM, plange01 wrote:

    buffett just got busted for insider trading thats as greedy as it gets...

  • Report this Comment On May 09, 2011, at 6:44 PM, Jyynx wrote:

    Plange01,

    The level of misinformation your comment shows is a little sad. How did Buffett profit from Sokol in any way? Please explain to us.

    He essentially lost his next heir to the Berkshire train over somebody else's greed. With a net worth in the area of tens of billions of dollars, do you really think Buffett is in any way stupid enough to risk all that for $3 million?

    Please do not continue to post trolling messages.

  • Report this Comment On May 10, 2011, at 12:23 AM, PeakOilBill wrote:

    I recently read somewhere that Best Buy signed an exclusive contract with Ford to install the charging stations for the new 100 mile range, all-electric Ford Focus, which is to go on sale late this year. The stations will charge it in about 3 hours at a cost equal to $1 a gallon gasoline. A 100 mile range will cover 96% of all vehicle daily commutes. When gas is rationed, that will be a cool car. Take it from an old guy who remembers the 1973 Arab oil embargo. Finding fuel and waiting a half hour in line for 10 gallons, became a major, very unpleasant part of my existence. I own no stocks, but probably should.

  • Report this Comment On May 10, 2011, at 6:20 AM, sydisquid wrote:

    Applying a Buffet deep value approach to NFLX doesn't make any sense. NFLX is a hyper-growth rule breaker stock that Buffet would never even consider. So applying a deep value approach to NFLX is mixing oranges and apples. If you are a growth investor then high P/E's are part of the game which has its own paradigms and worries. Obviously one of them being over valuation. If you are a deep value investor then obviously a P/E above 12 is high. So what gives? Maybe all you really need to say in the article is time to trim back, but that is what everyone has been saying about this stock for the past 3 years.

  • Report this Comment On May 10, 2011, at 7:34 AM, bigkansasfool wrote:

    Best Buy is a value trap. They don't have the selection they need to compete. They way overprice the little inventory they do have. They have NO customer service (or the employees are very rude and not knowledgeable which is worse), and their return policy is horrible. Best Buy is a classic value trap and is going the way of Circuit City. I live within walking distance of a Best Buy and it has been 2 years since I went there. It's better to buy from Amazon and wait for a few days, or if you need it today go to walmart.

    As for NFLX, Ssyyddii is mistaken. Buffett is a growth investor. However, there is a difference between paying a reasonable price for growth and irrational exuberance. The amount of actual growth needed to justify a P/E of 67.85 isn't likely to be accomplished by Netflix.

  • Report this Comment On May 10, 2011, at 7:56 AM, midnightmoney wrote:

    bought brk.b 1/5/10, sold 5/9/11 for a 20% gain. Coulda done much better or much worse. What impressed me most about the stock was that it held its value in the face of so much bad news, from Sokol to the massive drop in profit this quarter. Hard to imagine though that there won't be more of the same kinds of massive insurance losses along the way.I was compelled to sell for a couple of reasons, first among them that brk doesn't offer a dividend while just seeming to sit at 80. How long will people have to wait for it to move beyond the range it has entrenched itself in? Buying Lubrizol didn't do the trick, and neither did the great earnings report they posted for 4q 2010. Another motivation to sell was the status of what for so many seems to be a god--Buffett himself. Is he what's holding the stock back? Should the fact he's going to retire or expire make us fearful and therefore--by his logic, anyway--buyers? Or should his pending exit be taken as a sign that the best days for brk are over and therefore fear is a signal to sell and move on?

    Ford is underpriced, so is afsi. CSX is looking CSEXY these days. I'm not afraid of those stocks, but I think those are what are going to replace my brk shares.

  • Report this Comment On May 10, 2011, at 10:32 AM, 48ozhalfgallons wrote:

    Yesterday, I returned a Sony T110 camera to Best Buy. The employees were very polite and helpful. Much more so than in past years. In conversation, one employee said that he was thankful for his job. I noticed that the inventory and selection for the kind of camera I wished to exchange was depleted. Going further, 15% of the floor space was vacant. I've never seen that before. Few customers and many employees. Since Best Buy is the last remaining consumer electronics specialty store in our area when there use to be two others, I hope BB's stock does well, but I wouldn't buy it.

    I wouldn't be buying Sony either. Sony's new line of cameras are better than the pictures they take.

  • Report this Comment On May 11, 2011, at 12:44 PM, aaanglemyer wrote:

    I noticed that there was very little talk about the underlying economics of the stock. Although qualitative analysis is a vital part of the investment decision, it is only part of the story. In order to properly value a stock you need to understand how likely it is that the company can meet the expectations baked into its stock price. BBY has performed very well and it's likely that the company will be able to meet the hurdles set for by the market for the following reasons:

    1) BBY had a Free Cash Flow (FCF) of 2.2 billion during 2010 placing it in the 89th percentile of the S&P 500.

    2) BBY has a Price-to-Economic Book Value of .7.

    3) BBY's Return on Invested Capital (ROIC) has exceeded its Weighted Average Cost of Capital (WACC) for each of the last 10 years.

    For further information on how to pick stocks like BBY check out the following link:

    http://blog.newconstructs.com/2010/08/05/economic-versus-acc...

  • Report this Comment On May 11, 2011, at 3:55 PM, ernieslog wrote:

    as i said about the last motley fool article knocking best buy the convential wisdom is that everybody will buy everything on the internet, my predictions is that more than 90% of the sale of goods will involve, one way or another, a store, lovesdos

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