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
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
2. JPMorgan Chase
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
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
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
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.
