If you are looking for safe stocks that are relatively undervalued, the best place to start is Warren Buffett’s portfolio. As the best investor ever, none of Warren Buffett’s holdings has suffered permanent loss. If we buy relatively undervalued stocks that Warren Buffett already owns, the chance of losing money over long term should be small.
GuruFocus hosts many valuation tools, such as DCF Calculator and Reverse DCF Calculator, 10-year financial data, financial charts, and warning signs. A very useful tool is Peter Lynch charts, which can tell you clearly if a stock is undervalued and whether it is a good time to buy.
As a reminder, Peter Lynch chart is a tool legendary investor Peter Lynch used to determine the valuation of a stock. He drew a company a company’s stock price with the Earnings Line, and compare their prices. If the stock price is dramatically lower than the Earnings Line, it is usually a good time to buy.
We will go through Warren Buffett’s portfolio from the top to the bottom. Berkshire currently owns 41 stocks with the value of $85 billion. Not all the 41 stocks are bought by Warren Buffett himself. We are pretty sure that the top seven positions are bought by Warren Buffett himself. They are discussed in this article.
Wells Fargo & Co (WFC, Financial):
From 2003 to 2007 the price and Peter Lynch Earnings line (Price at P/E=15) is almost overlapped. After the financial crisis the stocks have been traded at lower P/E, although the trend follows the earnings growth. Compared with historical valuation, Wells Fargo appears to be about 25% undervalued.
This is confirmed by the recent purchase of Wells Fargo by Warren Buffett. He bought 18 million shares more Wells at the cost of $35.6 a share, which made Wells Fargo the largest holdings in Berkshire’s portfolio. Berkshire now owns 459 million shares at 40%, or $5.5 billion profit.
Coca-Cola (KO, Financial):
Historically traded at higher P/E. Currently is about the median P/E of the last 10 years. Based on Peter Lynch chart below, one wouldn’t have opportunity to buy Coke stocks over the past 20 years.
Evidently, Buffett hasn’t made any changes to his Coke shares for many years. His purchase was in 1988.
IBM (IBM, Financial):
Historically IBM stock prices fluctuated around the Peter Lynch Earnings Line. If it was above that (1999-2006), the stock would do poorly in the following years. If the prices were below Earnings Line, it would do well (2009-2011).
IBM appears to be fair valued at this point. Buffett bought most of his IBM shares in 2011, when the shares have similar valuation to where it is now. The current stock price should still be acceptable to him as he was still buying IBM last quarter. His average cost is about $172 a share. He is sitting on 18% profit with these shares.
American Express Co (AXP, Financial):
American Express is now traded at all-time high. It is also about 30% above its Earnings Line. Buffett hasn’t traded this stock for a long time.
Procter & Gamble Co (PG, Financial):
Historically PG is traded at higher than Peter Lynch Earnings Line. Currently it is about 10% higher. This is lower than the historical average. Warren Buffett has been selling P&G over the past years.
Wal-Mart Stores Inc (WMT, Financial):
WMT appears to be fair valued as the stock price is almost overlapped with Peter Lynch Earnings Line. Warren Buffett bought more Wal-Mart during the past 6 months. His cost average is about $55 a share.
US Bank (USB, Financial):
Similar to Wells Fargo (WFC), USB stock prices have followed Peter Lynch Earnings Line very closely. It appears to be about 20% undervalued currently. This is confirmed by the recent addition of USB stocks. Over the last quarter Berkshire bought more at about $33.6 a share. Currently the stock is traded at around $35. . Berkshire owns 61 million shares with an average cost of about $27 a share.
Conclusion:
We have applied Peter Lynch’s valuation technique into Warren Buffett’s top seven holdings. Among these seven stocks, Wells Fargo appears to be most undervalued. It is also the stocks that Warren Buffett bought the most over the last quarter. IBM and Wal-Mart, USB are fair valued and Buffett added to these positions too in the first quarter of 2013.
Coca, American Express, and P&G are overvalued, according to Peter Lynch chart. Buffett did not buy any of them lately. He is selling P&G.
We do not know how Warren Buffett made his purchase decisions. But surprisingly, Peter Lynch chart seems to work very well for him. He is buying only the stocks that are undervalued as measured by Peter Lynch chart and not the others.
Maybe we shouldn’t be surprised. Both Warren Buffett and Peter Lynch are among the greatest investors. They may think well alike.
Here is the complete portfolio of Warren Buffett. Also check out:
1. Warren Buffett's Undervalued Stocks
2. Warren Buffett's Top Growth Companies, and
3. Warren Buffett's High Yield stocks
4. Stocks that Warren Buffett keeps buying
GuruFocus hosts many valuation tools, such as DCF Calculator and Reverse DCF Calculator, 10-year financial data, financial charts, and warning signs. A very useful tool is Peter Lynch charts, which can tell you clearly if a stock is undervalued and whether it is a good time to buy.
As a reminder, Peter Lynch chart is a tool legendary investor Peter Lynch used to determine the valuation of a stock. He drew a company a company’s stock price with the Earnings Line, and compare their prices. If the stock price is dramatically lower than the Earnings Line, it is usually a good time to buy.
We will go through Warren Buffett’s portfolio from the top to the bottom. Berkshire currently owns 41 stocks with the value of $85 billion. Not all the 41 stocks are bought by Warren Buffett himself. We are pretty sure that the top seven positions are bought by Warren Buffett himself. They are discussed in this article.
Wells Fargo & Co (WFC, Financial):
From 2003 to 2007 the price and Peter Lynch Earnings line (Price at P/E=15) is almost overlapped. After the financial crisis the stocks have been traded at lower P/E, although the trend follows the earnings growth. Compared with historical valuation, Wells Fargo appears to be about 25% undervalued.
This is confirmed by the recent purchase of Wells Fargo by Warren Buffett. He bought 18 million shares more Wells at the cost of $35.6 a share, which made Wells Fargo the largest holdings in Berkshire’s portfolio. Berkshire now owns 459 million shares at 40%, or $5.5 billion profit.
Coca-Cola (KO, Financial):
Historically traded at higher P/E. Currently is about the median P/E of the last 10 years. Based on Peter Lynch chart below, one wouldn’t have opportunity to buy Coke stocks over the past 20 years.
Evidently, Buffett hasn’t made any changes to his Coke shares for many years. His purchase was in 1988.
IBM (IBM, Financial):
Historically IBM stock prices fluctuated around the Peter Lynch Earnings Line. If it was above that (1999-2006), the stock would do poorly in the following years. If the prices were below Earnings Line, it would do well (2009-2011).
IBM appears to be fair valued at this point. Buffett bought most of his IBM shares in 2011, when the shares have similar valuation to where it is now. The current stock price should still be acceptable to him as he was still buying IBM last quarter. His average cost is about $172 a share. He is sitting on 18% profit with these shares.
American Express Co (AXP, Financial):
American Express is now traded at all-time high. It is also about 30% above its Earnings Line. Buffett hasn’t traded this stock for a long time.
Procter & Gamble Co (PG, Financial):
Historically PG is traded at higher than Peter Lynch Earnings Line. Currently it is about 10% higher. This is lower than the historical average. Warren Buffett has been selling P&G over the past years.
Wal-Mart Stores Inc (WMT, Financial):
WMT appears to be fair valued as the stock price is almost overlapped with Peter Lynch Earnings Line. Warren Buffett bought more Wal-Mart during the past 6 months. His cost average is about $55 a share.
US Bank (USB, Financial):
Similar to Wells Fargo (WFC), USB stock prices have followed Peter Lynch Earnings Line very closely. It appears to be about 20% undervalued currently. This is confirmed by the recent addition of USB stocks. Over the last quarter Berkshire bought more at about $33.6 a share. Currently the stock is traded at around $35. . Berkshire owns 61 million shares with an average cost of about $27 a share.
Conclusion:
We have applied Peter Lynch’s valuation technique into Warren Buffett’s top seven holdings. Among these seven stocks, Wells Fargo appears to be most undervalued. It is also the stocks that Warren Buffett bought the most over the last quarter. IBM and Wal-Mart, USB are fair valued and Buffett added to these positions too in the first quarter of 2013.
Coca, American Express, and P&G are overvalued, according to Peter Lynch chart. Buffett did not buy any of them lately. He is selling P&G.
We do not know how Warren Buffett made his purchase decisions. But surprisingly, Peter Lynch chart seems to work very well for him. He is buying only the stocks that are undervalued as measured by Peter Lynch chart and not the others.
Maybe we shouldn’t be surprised. Both Warren Buffett and Peter Lynch are among the greatest investors. They may think well alike.
Here is the complete portfolio of Warren Buffett. Also check out:
1. Warren Buffett's Undervalued Stocks
2. Warren Buffett's Top Growth Companies, and
3. Warren Buffett's High Yield stocks
4. Stocks that Warren Buffett keeps buying
