Stock investors were not impressed when Warren Buffett's Berkshire
Hathaway recently announced it had taken a sizable position in
energy giant ExxonMobil.
Many commentators shrugged and some even tweeted
out things like "yawn" in response to Berkshire adding the Dow
component to its portfolio.
That's because it joins a bunch of other Dow
Industrial companies already in the Berkshire portfolio.
At the end of the third quarter, Berkshire had
$104.9 billion invested in equities. Its top 4 holdings reads like
a who's who of the Dow Industrials: American Express, Coca-Cola,
IBM and Wells Fargo. Just those four positions, alone, account for
$58.4 billion of the portfolio.
Berkshire disclosed its Exxon position was 40
million shares for $3.4 billion. It's another sizable large cap
position.
Berkshire Is Too Big
Berkshire Hathaway has a market cap of $282
billion. It owns over 80 companies and invests in dozens more. But
when you have a portfolio that is over $100 billion, you can't just
buy any small cap stock that stokes your fancy.
The larger you are, the more likely you are to
invest in mid-to-large cap companies. Investing in dozens of small
cap companies with $500 million market caps won't make a dent a
portfolio that is worth $100 billion. For example, even if that
$500 million doubles in value and becomes a $1 billion company,
that's still just a drop in the bucket for a $100 billion
portfolio.
That's why Berkshire is now saddled with numerous
well known Dow component companies and owns no shares in companies
with market caps under $1 billion.
Small is King
If you want growth, you buy small cap companies.
Those are companies whose market cap is under $1.5 billion. Earlier
in his career, before Berkshire grew into a billion dollar
behemoth, Buffett used to buy obscure small cap companies and ride
them higher to great returns.
If you really want to invest like Buffett, invest
like the young Buffett. Forget all of Berkshire's recent
purchases. Look for small cap companies that Buffett would have
liked to own if he could he still buy small caps.
I did a screen for small cap stocks with Zacks Rank
#1 (Strong Buy) and (Buy) stocks that also were value stocks,
either through P/E, P/B or P/S, or a combination of those.
And then I asked: Would a young Buffett have bought
this stock?
3 Stocks That a Young Buffett Would Have
Loved
1. Haverty Furniture
2. Salem Communications
3. The Andersons
1. Haverty Furniture (HVT)
Buffett is a lover of furniture companies.
Berkshire Hathaway owns several, including Jordan's Furniture, a
furniture retailer founded in 1918 in Massachusetts. But one of his
more famous investments was the 1983 purchase of Nebraska Furniture
Mart. Headquartered in Omaha, Nebraska, it was started in 1937 by
Rose Blumkin who sold it to Buffett with a handshake deal.
It has three stores, including one in Omaha, one in
Kansas City and one in Des Moines, Iowa. Expansion into Northern
Texas is expected in the next several years.
Haverty Furniture fits within Buffett's model.
Founded in 1885, and public since 1929, it is headquartered in
Atlanta and still has Havertys working in the management team. The
company has now grown to over 119 stores in 16 states.
On Oct 30, the company reported a record third
quarter as it blew by the Zacks Consensus Estimate by 24%. Earnings
of $0.42 were up 180% compared to the year ago quarter as the
company cut expenses.
Sales rose 11.6% with same-store-sales jumping
11.8%. The average ticket gained 5.6%.
The company finished the third quarter with $79.1
million in cash and NO debt.
Valuations are still attractive even though the
shares are at 2-year highs. Havertys is benefiting from the housing
market recovery. Earnings are expected to rise 98% in 2013 and
another 16% in 2014.
Forward P/E = 21.7
P/B = 2.3
P/S = 0.9
Zacks Rank #2 (Buy)
Market Cap: $650 million
2. Salem Communications
Corporation (SALM)
Buffett has always had a thing for media companies,
especially newspapers. Berkshire Hathaway still owns the Buffalo
News, which Buffett purchased in 1977.
But if Buffett were young today, he may be more
interested in other media platforms, including the Internet.
Salem Communications is the largest Christian and
conservative radio broadcaster in America. Founded in 1986, it
operates 101 radio stations in 39 markets. It also operates an
Internet and publishing divisions, including Christianity.com,
Jesus.org and Christian videos at GodTube.com. It's publishing
division includes FaithTalk Magazine and Preaching and Townhall
Magazine.
On Nov 5, it reported third quarter results which
saw revenue rise 3.1% to $58.5 million. Radio revenue increased
just 0.3% but that was because the heavy political ad buying of
last year was absent. In it's fourth quarter guidance, the company
also cited the loss of political ads as a drag on revenue.
But Internet sales were the big driver for the
quarter, rising 20.4% to $9.4 million from $7.8 million.
While the company is expected to lose $0.21 a share
this year, earnings are forecast to soar by 397% to $0.63 in
2014.
The company has no forward P/E due to the expected
loss in 2013. But its other valuation metrics are still attractive.
Salem also pays a dividend, currently yielding 2.5%, which is rare
for a company of its size.
Forward P/E = N/A
P/B = 1.1
P/S = 0.9
Zacks Rank #2 (Buy)
Market Cap: $224 million
3. The Andersons (ANDE)
Buffett likes "old" industry companies like
railroads and chemicals. These are companies which are the building
blocks of the economy.
It's surprising, then, to see that Berkshire
Hathaway doesn't own any agribusinesses outright.
The Andersons was founded in 1947 by Harold and
Margaret Anderson as a single grain terminal in Ohio with the
purpose of helping farmers get their corn to market. It has grown
into a 6 division business with grain, plant nutrients, railcar
leasing and repair, industrial products formulation, turf products,
retail and ethanol operations.
On Nov 6, The Andersons posted a monster 50% beat
as earnings were $0.91 compared to the Zacks Consensus Estimate of
just $0.61. Ethanol and the Rail Group led the quarter, with the
Grain Group also solid.
The company had been cashing in on higher
fertilizer prices the last few years when that was hot but now it
is Ethanol that has taken that position. However, one thing to
watch is that the EPA has issued a Proposed Regulation which will
change ethanol requirements in 2014.
Investors don't seem worried about the impact on
The Andersons as shares have barely budged from their 2 year
high.
The Andersons is expected to grow earnings by 10%
in 2013 and another 23% in 2014. Despite trading near its
multi-year high, there's still value in these shares.
Forward P/E = 18
P/B = 2.3
P/S = 0.3
Zacks Rank #1 (Strong Buy)
Market Cap: $1.5 billion
[In full disclosure, the author of this article
has owned XOM since 2000.]
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Tracey Ryniec is the Value Stock Strategist for Zacks.com.
She is also the Editor of the Turnaround Trader and Value Investor
services. You can follow her on twitter at @TraceyRyniec.
ANDERSONS INC (ANDE): Free Stock Analysis Report
HAVERTY FURNIT (HVT): Free Stock Analysis Report
SALEM COMM (SALM): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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