In our ongoing series of chats with Fool analysts and advisors, I've been asking them about the stocks on their watchlists and the catalysts that would induce them to buy. Today, the man in charge of training our analysts provides two excellent companies that he owns and believes deserve strong consideration for a spot in your portfolio – no catalyst required.
Large caps on sale
Buck Hartzell has been investing for decades and can't recall a time when large caps have been quite as cheap. His biggest challenge now is deciding which of the companies that meet his strict criteria are the best buys now. In short, he's looking for:
- Strong and growing businesses.
- Very low multiples.
- Unparalleled balance sheets.
- A trend of buying back more of their shares.
Here are two stocks that Buck owns and likes at today's prices.
Going to the Wells
In the competition of Buck vs. The Market, I'm generally going to side with Buck, especially if he's got Warren Buffett on his side. And Buck's pretty confident that the market has misunderstood the Wells Fargo
Banks make money two ways: on the spread between the rate they pay for borrowing money and the rate they receive when they loan it out, and by the fees they charge for their services. Wells Fargo boasts an enviably low cost of funds and it's the king of cross-selling, with a stated goal of selling an average of eight different products to each of its customers. Bringing Wachovia in line with those numbers -- and Buck believes the integration is progressing ahead of schedule -- could mean dramatic profits. Still, in no small part due to the general messiness of the banking industry, Wells Fargo is undervalued. Buck believes it's worth buying today. Increased capital requirements have hindered its ability to increase the dividend, but as earnings continue to pile up, look for that to come back in spades. He believes it's quite possible that you'll see Wells Fargo boost its dividend from $0.20 per share to $1.40 per share in five years.
Head for the Mountains
Buck proudly refers to his second recent buy, White Mountains Insurance Group
- Invest in profitable businesses with good returns on capital.
- Find honest and talented management with capital discipline.
- Seek out companies with attractive opportunities to reinvest their capital.
- Buy at a fair price.
White Mountains is right up Gayner's alley. The financial services holding company has its primary business interests in property and casualty insurance and reinsurance and has proven to be disciplined when it comes to its policy underwriting. Buck thinks it will soon be rewarded for that prudence -- and for its investing prowess -- even if the market is slow to appreciate it. Shares are trading below book value, and that won't be the case for too long. And it does sport a modest dividend.
But of even greater interest to Buck is its ability to start successful sidecar companies, spin them off into their own businesses, and sell them off when appropriate. It founded Montpelier Re
Overall, White Mountains is cheap because it's caught in a down cycle for the insurance industry. Buck expects the company to keep growing in a profitable way, and ultimately, investors will be willing to pay a handsome premium to book value to own these shares. It's time to get on this train before share prices move back up the Mountain.
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