The Oracle of Omaha remains keen on these companies and has been adding to Berkshire Hathaway’s positions in them.
The Oracle of Omaha, billionaire Warren Buffett, took a real beating last week.
Two of his largest stock holdings at Berkshire Hathaway (NYSE: BRK-B) seemed to fall off a cliff.
One of his biggest disappointments this year has been International Business Machines (NYSE: IBM). The information technology company was down 11% last week, leading to a cool $1.4 billion loss for Berkshire.
Then there’s Coca-Cola (NYSE: KO), which was down over 4% last week, clocking in a $700 million loss for the Berkshire portfolio.
Another one of Buffett’s big losers this year has been the U.K. grocer, Tesco (OTCMKTS: TSCDY). Shares are down 13.5% for the last month and down 50% year-to-date. Buffett has taken a $700 million loss on the stock.
But don’t feel too bad for Buffett. He’s still worth over $40 billion and the Berkshire stock portfolio was still up nearly 12% for the last year ending June 30.
Along with IBM and Coca-Cola, Berkshire also owns American Express (NYSE: AXP) and Wells Fargo (NYSE: WFC). Together, these four stocks make up over 60% of the Berkshire stock portfolio.
However, Berkshire doesn’t really do much with these four stocks. Buffett owns a large stake and tends to let it ride for the long term.
We’d rather take a closer look at some of the stocks that Berkshire has been showing a keen interest in of late.
These stocks also happen to be smaller than the likes of IBM and Coca-Cola, which means that although they make up less of the Berkshire portfolio, it still has a meaningful stake in these companies.
One example is Suncor Energy (NYSE: SU). It’s a Canadian oil sands name that we dug into earlier this month. Berkshire increased its stake by 26% during the second quarter of this year.
It’s innovative and unique companies like these that Buffett is starting to take a keen interest in. Here are three more Warren Buffett stock picks overlooked by most investors:
Warren Buffett Stock Pick No. 1: USG Corp. (NYSE: USG)
During the second quarter, Buffett’s Berkshire added to its USG position by 11%. Berkshire is the company’s largest shareholder, owning 27% of USG.
USG is a producer of building products and is the largest maker of drywall in North America. Its balance sheet has been strengthened since the housing bubble thanks to debt refinancing and the recovering demand for drywall.
2012 was the first year that USG saw an increase in wallboard prices since 2006. Going forward, the continued recovery in the residential and commercial will be a big positive for the building supply company. USG will also benefit from continued repairs and remodeling — USG believes that 55% of the industry volume for drywall is driven by repair and remodel activity.
USG has historically been heavily tied to the United States and Canadian markets, where it generated some 90% of revenues last year. However, it formed a joint venture with Boral Limited last year, which should help push USG to become a global distributor. Boral Limited operates in Asia, Australia and the Middle East.
USG trades at a forward P/E (price-to-earnings ratio based on next year’s earnings estimates) of just 12. Coupling that with Wall Street’s expected earnings growth rate for the next five-years and USG’s P/E-to-growth rate (PEG) ratio is 0.9 — anything below a 1.0 is considered a growth at a reasonable price stock.
Warren Buffett Stock Pick No. 2: Chicago Bridge & Iron Co. (NYSE: CBI)
Although shares of Chicago Bridge were down 20% during the second quarter (and down 35% year-to-date), Berkshire was upping its stake during the second quarter. The Omaha-based conglomerate increased its stake in Chicago Bridge by 12%, bringing its ownership in the company to just under 10%.
Chicago Bridge is a provider of engineering services to companies in the energy, petrochemical and natural resources sectors. Its $3 billion acquisition of The Shaw Group was a major deal for the company and boosts its capabilities in the nuclear building market.
It looks as if Chicago Bridge is all set to benefit from the rising demand of energy infrastructure projects in the oil sands and liquid natural gas markets. The engineering company’s work backlog last quarter was up 25% on a year-over-year basis to $30.7 billion — nearly 2.5 times its annual revenue. It’s also a very global company, generating over 55% of its revenues from outside the United States.
Just like USG, Chicago Bridge’s valuation is also very compelling. Its forward P/E ratio is 9.2 and its PEG ratio is a low 0.7.
Warren Buffett Stock Pick No. 3: VeriSign (NASDAQ:VRSN)
Berkshire upped its stake in VeriSign by 11% during the second quarter. Now Buffett’s Berkshire owns just over 10% of the company.
VeriSign manages domain names, including .com, .net, and.name domain names. So it makes its money by charging fees for operating domain names. And thanks to its agreement with the Internet Corporation for Assigned Names and Numbers (ICANN), VeriSign is the exclusive registry for .com names — this agreement isn’t up for renewal until the end of 2018.
The other angle for VeriSign is its Network NIA service business, which provides cyber security services. As the adoption of cloud computing continues to rise, companies of all sizes will look to boost spending to protect their data.
All in all, VeriSign remains a solid recurring cash-flow business. Over the last twelve months, VeriSign has generated enough free cash to cover 6% of its market cap. It now has $1.47 billion in cash, compared to its $7.15 billion market cap.
With that cash, VeriSign remains committed to boosting shareholder value with buybacks. It had $1 billion available under its current buyback program as of the start of the third quarter — enough to reduce shares outstanding by 14%. And over the last five years, the company has managed to reduce shares outstanding by over 36%.
At 84 years of age, Buffett has a lifetime of knowledge and is considered a pro at finding easy-to-understand businesses that have a knack for beating the market. The three Warren Buffett stock picks above will never get as much press coverage as the likes of IBM and Coca-Cola, but if Buffett is paying attention to them, you would be wise to do so, too.
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