Why does Warren Buffett like General Motors? One big reason has to be its savvy, investor-focused CEO, Mary Barra. Image source: General Motors.
Sometimes, watching the big names can lead us to intriguing investments that we might have otherwise overlooked. But sometimes, the companies that have big positions in the great investors' portfolios aren't necessarily great buys for the rest of us. Here's a look at three very well-known companies that are big holdings in some high-profile portfolios -- with our Foolish takes on whether they're good investments for the non-billionaires among us.
In November, David Einhorn's Greenlight Capital disclosed a new position in Garmin (GRMN -0.41%). The fund picked up a total of 625,000 shares, representing a fairly modest position, at just 0.4% of the total portfolio's weight. The fund has not yet released a shareholder letter to discuss the investment thesis, nor has Einhorn made a flashy presentation at any investment conference, as of this writing.
Still, I find this pick a little odd, since Garmin has many headwinds going forward. The company's core auto segment continues to decline expectedly (down 14% last quarter), as does its outdoor business (down 5% last quarter). Meanwhile, gross margins are also compressing, in part due to a shift in geographical revenue mix and the strengthening U.S. dollar. The company also says the aviation industry is weak, although Garmin's aviation segment is a relatively smaller part of the business.
Of course, Greenlight Capital takes a value-oriented approach and prefers "misunderstood companies at low valuations relative to their underlying assets and future cash flows," and Einhorn has a strong track record of bargain-hunting. In my opinion, though, there's not a lot to love about Garmin.
Brian Feroldi
It's been a rough couple of years to be a shareholder of IBM (IBM 0.31%). For 15 quarters in a row, Big Blue has reported declining sales, causing shares to wane. IBM's stock has shed more than 40% of its value since reaching its peak in 2013, leaving many investors to wonder what it's going to take to get this growth story back on track.
Despite the stream of disappointing results, IBM has made a believer of at least one billionaire: Warren Buffett. Buffett has turned Berkshire Hathaway (BRK.A 0.62%) (BRK.B 0.56%) into the largest shareholder of IBM, as Berkshire currently owns more than 8% of IBM's shares outstanding. Unfortunately, Buffett's ringing endorsement of the company's shares -- and its management team -- has done little for shareholders who followed him into the stock.
IBM's recent results continue to show that the company is struggling. Revenue declined by 9%, while earnings dropped by an even steeper 17%. Currencies continue to wreak havoc on the company's financial statements, but even after adjusting for them, the company's total revenue continues to fall as businesses everywhere shift away from IBM's legacy enterprise systems and toward cloud and data centers. While IBM is pushing hard into the cloud and having a lot of success, it hasn't been enough to stem the declines elsewhere. 2016 looks to be more of the same as its management team is forecasting that earnings will fall another 9.5% from here.
I'll admit that when Buffett put his seal of approval on IBM's stock, I become a believer, but the company's results have been tough to swallow. While its P/E of 9 and a dividend yield approaching 4% will likely mute any more downside, without any revenue or profit growth coming, it's hard for me to see how this company becomes a market-beater from here.
John Rosevear
It might be hard to see what Buffett and the Berkshire Hathaway team see in IBM. But if you haven't been paying close attention to developments in Detroit over the last couple of years, it might be even harder to see what they like about General Motors (GM -0.45%) -- a company lots of Americans seem to love to hate.
As of the end of the third quarter, Berkshire held a nice, round 50 million shares of the General, making it GM's fifth-largest shareholder. That might seem strange, but speaking as someone who gets paid to watch GM and its rivals, it's no surprise to me that Berkshire has put a big bet on the General and its savvy CEO, Mary Barra.
Under Barra (and her now-retired predecessor, Dan Akerson), GM has moved a long way from the company that crashed into bankruptcy court in early 2009. It's not just that GM is solidly profitable, or that its product-quality ratings are now on par with the best of the Japanese brands (yes, really) -- it's that Barra and her team have adopted management approaches that seem to be taken right out of Buffett's playbook.
For decades, GM's biggest measure of its own success was sales volume. That led past management teams to some dubious decisions, like dumping cars onto rental-car fleets at deeply discounted prices. Under Barra, GM measures its results using positively Buffettesque metrics like "return on invested capital." If a product or a business line isn't generating a good return, Barra won't hesitate to shut it down and put that capital to work elsewhere, without any worry about its effect on GM's place in the global sales race. She has done exactly that more than once -- perhaps most notably, in withdrawing GM from the troubled Russian market.
While other old-line automakers are scrambling to respond to the threat of disruption from high-tech upstarts. Barra and her second-in-command, GM president (and Morgan Stanley veteran) Dan Ammann, have been taking bold action. GM's $500 million investment in Lyft and its surprisingly competitive new electric Chevrolet Bolt EV are just the most visible recent signs of yet another major shift in the thinking at America's largest automaker.
Simply put, in the last few years, GM has turned into an extremely well-managed and disciplined leader in a very tough business. That's clearly what Buffett, who loves well-managed but understandable basic businesses, sees in GM. But what about the rest of us?
On one hand, automakers are cyclical businesses, meaning their profits and share prices tend to rise and fall with economic cycles. GM has a massive global presence, but it still earns the bulk of its profits here in the United States -- and there are good reasons to think new-vehicle sales in the U.S. are close to peaking.
But on the other hand, GM has a very strong balance sheet that will allow it to ride out a downturn without worry, it pays a solid dividend (with a yield close to 5% as I write this), and it has a sharp and future-oriented management team that is focused on delivering good returns to shareholders. Buffett thinks that adds up to a winning long-term investment, and I agree.
