Warren Buffett's 3 High-Conviction Stocks
Though his buying of new companies has been sparse, he has been buying greater portions of companies he already owns at a fast rate, signaling that these are high-conviction picks. The companies he has been buying the most over the longest period are: Wal-Mart Stores Inc. (NYSE:WMT), U.S. Bancorp (NYSE:USB) and DaVita HealthCare Partners Inc. (NYSE:DVA) (a stock purchased by his portfolio manager, Ted Weschler).
Buffett has held Wal-Mart since before 2009, but his buy in the first quarter of this year — consisting of 8,568,679 shares — was his largest since third quarter 2009. He has also been buying smaller bits of stock at intermittent quarters since 2012. His first quarter average share price was $75, and his average share price for all of his shares was $60, giving him a gain of around 27% on this position. The stake is worth about $4.45 billion, encompassing 4.2% of his portfolio.
Wal-Mart, the massive low-price retailer, has continued to grow in the past five years at a considerable pace. Its annual per-share growth rates are 8.6% for revenue, 8% for EBITDA and 7% for book value. The company also reports a high return on equity, never falling below 20% since 2009. Its return on assets has hovered between 7.8% and 9.07% since 2009.
In each year of the decade, Wal-Mart increased its revenue over the previous one. In addition, its profit has been in the low to mid-teens for each year of the decade.
Yet Wal-Mart remains relatively cheap by several valuation standards: Its P/E ratio is 15.5, near its one-year low point. Its P/E ratio at 3.39 is also near its lowest point in a year.
For the second quarter of 2014, the company expects earnings per share from continuing operations in the range of $1.15 and $1.25, compared to $1.24 the previous year.
U.S. Bancorp (NYSE:USB)
Second, Buffett appears to have high confidence in U.S. Bancorp. His stake in the company predates 2009, but in 2013 his steady selling turned into steady buying. He has purchased shares of the company in each quarter since the first of 2013, ending with 705,796 shares in first quarter 2014, when the price averaged $41 per share. This built his stake up to 80,026,697, with a value of $3.4 billion, and around a 24% gain on his average buy price of $35.
Rates of growth at U.S. Bancorp have been rapid in the recent five years, with revenue at 4.7%, EBITDA at 27.8%, free cash flow at 13.4% and book value at 11.9%. The company maintained a return on equity of above 14% since 2011, and a return on assets above 1.4% in the same span.
Like Wal-Mart, U.S. Bancorp maintained increasing annual revenue for the entire decade including through the financial crisis of 2008 and 2009. Its profits have also increased each quarter since 2009, reaching $5.8 billion in 2013.
U.S. Bancorp pays a dividend of $0.23 per quarter, at a level of $0.89 for full-year 2013, which marked its third consecutive annual increase since it was reduced to $0.20 in 2010.
In the first quarter, the nonperforming assets on U.S. Bancorp’s balance sheet decreased by 1% quarter over quarter, and 11.6% year over year. Its capital plan was also approved by the Federal Reserve on March 26, 2014, allowing it to make a share repurchase authorization valued at $2.3 billion effective April 2, and recommend a second quarter dividend of $0.245 per share — a 6.5% increase.
U.S. Bancorp trades around a 10-year high price on Friday, with a P/S ratio near it’s five-year high point. The bank has a P/E of 14.3 and P/B of 2.1.
DaVita HealthCare Partners Inc. (NYSE:DVA)
Last, Buffett’s portfolio Ted Weschler feels strongly about DaVita HealthCare Partners. He has been adding shares to the portfolio quarterly since he started the stake in fourth quarter 2011. In the first quarter of this year, he added 1,159,858 shares, at an average price of $66. On his overall buy price average of $49, he has a 45% gain. The stake is valued at $2.59 billion.
DaVita, the kidney dialysis company, is also a fast grower. In the past five years, its rates of growth were 17.1% for revenue, 16% for EBITDA, 34.7% for free cash flow and 21.5% for book value. DaVita has a return on equity of 14.3% in 2013, versus 14.2% in 2012. Its return on assets also measured 3.7%, from 3.35%.
DaVita grew revenue each year of the decade, with no downturns in the recession years. It has also been profitable in each year of the decade, with net income increases annually since 2010.
In the first quarter, the company served roughly 170,000 patients at 2,173 outpatient dialysis centers — 2,098 in the U.S. and 75 in 10 countries outside the U.S. It opened 24 new dialysis centers during the quarter, and opened one in the U.S. The company also bought a dialysis center and opened another one outside of the U.S.
DaVita is trading on Friday near its highest price in 10 years, while its P/E ratio has declined to almost a one-year low. DaVita has a P/B ratio of 3.3 and P/S ratio of 1.3.
For more stocks bought by Warren Buffett (Trades, Portfolio) or his portfolio managers at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), visit their portfolio here. Not a Premium Member of GuruFocus? Try it free for 7 days here!