Warren Buffett is perhaps the most successful investor alive. The Oracle of Omaha has built one of the largest fortunes in the world by investing in top-quality companies for the long term. For this reason, smart investors are always trying to find opportunities among Warren Buffett stocks.
If you are looking for attractively valued companies in Buffett's portfolio, our contributors believe that IBM (NYSE:IBM), Wal-Mart (NYSE:WMT), and MasterCard (NYSE:MA) deserve some serious consideration.
Tim Green (IBM): After decades of largely avoiding technology stocks, in 2011, Buffett spent billions of dollars building a stake in IBM. Big Blue is now the third-largest holding in Berkshire's portfolio, and Buffett has been adding to this stake over the past few years despite the ongoing revenue and profit declines at the company.
Shares of IBM are now right back where they were at the beginning of 2011, falling around 30% since peaking toward the beginning of 2013. Revenue is down, driven by both IBM selling off businesses and currency issues, and the relentless growth of per-share profits over the past decade coming to a grinding halt.
IBM is deeply entrenched in many of the world's largest businesses and organizations. Its mainframe systems are at the heart of banks, major retailers, and governments around the world, and organizations that outsource IT and business processes to IBM are unlikely to switch vendors on a whim. Despite the turmoil at IBM these days, its services backlog is growing, adjusted for divestitures and currency.
IBM expects to earn at least $15.75 per share this year, which puts its P/E ratio at about 9.2. This makes IBM one of the cheapest big tech stocks available, with the market expecting very little from IBM. Buffett's view of the company remains unchanged despite its poor results, and investors buying at today's prices are getting an incredible deal for a company on which Buffett has bet billions.
Andres Cardenal (Wal-Mart): Wal-Mart is clearly offering an attractive entry price: The retail giant is trading at a price to earnings ratio around 13, a substantial discount versus the average company in the S&P 500 index, which trades at a price to earnings ratio in the neighborhood of 19.
With forecasted sales in the area of $486 billion this fiscal year, Wal-Mart is the biggest retailer on the planet. This represents a challenge for the company when it comes to finding growth opportunities in a stable and mature industry such as discount retail. On the other hand, scale advantages represent a major source of competitive strength in the business.
Because of its size, Wal-Mart can negotiate aggressively low prices with suppliers and convenient payment conditions. Besides, the company can spread its fixed costs over large sales volumes, which reduces fixed costs per unit. These cost advantages can be crucial when it comes to offering its products for "everyday low prices."
The company is betting on smaller stores to jump-start growth, and this initiative seems to be a smart move. Comparable sales in the neighborhood format increased 7.3% last quarter. Management is also investing for online growth, and overall global e-commerce constant currency sales grew by a strong 16% in the latest earnings report.
While investors should not expect explosive growth from Wal-Mart anytime soon, it's good to see that management is finding some promising growth venues.
Steve Symington (MasterCard): Of all the intriguing stocks in Berkshire Hathaway's portfolio, I think now's a great time for investors to take a swipe at MasterCard. MasterCard might not look "cheap" at first glance, with shares trading around 28 times trailing-12-month earnings and 23 times next year's estimates, but there's a reason Buffett's latest holdings included more than 5.2 million shares of the global payment networks provider -- a stake worth more than $481 million as of this writing.
Through a combination of growing its core payments business, acquisitions, and building out its data analytics capabilities, MasterCard's management has set ambitious long-term goals of maintaining impressive operating margin of at least 50%, compound annual revenue growth of 11% to 14%, and compound annual earnings growth of 20%.
That said -- and though it's hardly alone in this -- MasterCard has also had to endure sluggish spending amid global macroeconomic uncertainty in recent quarters. Growth slowed significantly in Q2, with revenue increasing an anemic 0.9% (or 7% on a constant-currency basis) year over year to $2.39 billion. Adjusted net income climbed a slightly more impressive 12% over the same period to $965 million, and 15% on a per-share basis to $0.85. Still, gross margin remained strong at 54.9%, and MasterCard has proven its prudence in effectively managing expenses in this more difficult environment.
What's more, MasterCard continues to win new business and grow its share of the market in the meantime. And considering the company estimates that 85% of the world's financial transactions are still conducted in cash, MasterCard's growth story appears to still be in its infancy. For investors willing to buy and hold as that growth plays out, the financial rewards could be enormous.