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Margaret Moran
Margaret Moran
Articles (117) 

Warren Buffett’s Top Undervalued Holdings at 2019 Close

These companies provide potential value opportunities for the year ahead

December 26, 2019 | About:

Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway has an equity portfolio valued at $214.67 billion as of Dec. 26, 2019. As the U.S. economy stretches out its longest bull market in history, value investors are finding it more difficult to find good value opportunities. Thus, during the 2019 third quarter, neither Buffet nor his portfolio managers, Ted Weschler and Tedd Combs, added to any of the company’s existing positions, despite Berkshire’s record cash pile of $128 billion.

As 2020 approaches, these undervalued Berkshire Hathaway holdings may be able to provide value to shareholders in light of strong company and industry growth.

Globe Life Inc.

Buffett has held a position in Globe Life Inc. (NYSE:GL) since 2001. The 6,353,727-share investment has achieved an annualized return of approximately 10.5%. Over the past decade since 2009, the stock price has appreciated about 717.53% to $106.58 per share. Berkshire currently owns 5.87% of Globe Life’s shares outstanding.

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Globe Life is a life insurance and annuities company based in McKinney, Texas. As of Dec. 26, it has a market cap of $11.54 billion, a price-earnings ratio of 16.08 and a three-year revenue growth rate of 7.9%. GuruFocus has assigned the company a financial strength score of 2 out of 10 and a profitability score of 6 out of 10.

According to an earnings-based discounted cash flow model, shares of Globe Life are worth $126.25 apiece as compared to the current price of approximately $106.58. The Peter Lynch chart places the current stock price at a little bit above fair value.

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As a whole, the life insurance industry in the U.S. is faring well as the population ages. The industry grew approximately 3.7% in 2017 and 5% in 2018, according to data from McKinsey & Company. Globe life’s revenue grew at a faster rate than the industry average over the past three years, due largely to a relatively easy online sign-up process.

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Delta Air Lines Inc.

Berkshire Hathaway established a holding in Delta Air Lines Inc. (NYSE:DAL) in 2016 and has since increased the number of shares owned to 70,910,456. According to GuruFocus’s calculations, the investment has returned a 25.71% cumulative gain. Buffett is currently Delta’s largest guru shareholder with 10.96% of shares outstanding.

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Delta is a major U.S. airline headquartered in Atlanta, Georgia. As of Dec. 26, it has a market cap of $38.52 billion, a price-earnings ratio of 8.39 and a three-year revenue growth rate of 8.1%. GuruFocus has assigned the company a financial strength score of 4 out of 10 and a profitability score of 8 out of 10.

The Peter Lynch fair value places the fair price for Delta shares at $131.21 apiece, which is higher than the current share price of $59.42. Another value calculation based on Peter Lynch's investing style, the Peter Lynch chart, also shows the stock as being undervalued.

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A significant headwind for airlines (and transportation in general) is an expected increase in light fuel prices due to IMO 2020, which will require marine vessels to use fuels with less than 0.5% sulfur content (unless they have scrubbers installed that can clean up sulfur emissions to less than 0.5%). Analysts expected the price of jet fuel to increase starting in 2019 due to increased demand for cleaner-burning fuels, but this prediction did not translate to reality. Delta’s fuel expenses dropped by $35 million in the second quarter of 2019, down 2% from the previous quarter to an average price of $2.08 per gallon. The price per gallon of fuel for the third quarter of 2019 was only $1.96.

The International Marine Organization has clarified that scrubbers are an acceptable alternative to light fuels, so the majority of companies with large ocean-going vessels are opting out of finding ways to source higher quality fuels. Thus, light fuel prices are not as likely to shoot up as high as analysts once feared. With global air traffic expected to grow another 4.1% in 2020, Delta will likely continue to profit despite fuel headwinds, though investors may want to wait until the first effects of IMO 2020 are felt before deciding whether to establish a position in the company.

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Apple Inc.

Buffett established a position of 9,811,747 shares in Apple Inc. (NASDAQ:AAPL) in 2016. From there, he added to the position until Berkshire owned 252,478,779 shares before cutting back slightly to 248,838,679. According to GuruFocus’s calculations, Berkshire has achieved a total estimated gain of 97.78% on the position. At present, Buffett holds 5.6% of Apple’s total shares outstanding.

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Apple is a tech company based in Cupertino, California. It designs, develops and sells a variety of consumer electronics, software and online services. As of Dec. 26, the company has a market cap of $1.27 trillion, a price-earnings ratio of 24.48 and a three-year revenue growth rate of 12.6%. GuruFocus has assigned it a financial strength score of 6 out of 10 and a profitability score of 10 out of 10.

Such a massive holding in a famous tech giant may seem out of place for a tech-wary value investor, but according to an earnings-based discounted cash flow model, shares of Apple are worth $337.35 apiece – even more than the current share price of $289.91. The company has also been reducing its debt and increasing its cash on hand in recent years.

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The Oracle of Omaha said on a 2018 interview with CNBC that Apple “makes its products indispensable.” He holds a stake in the company worth more than $56 billion because of the power of its brand name and the way its products have become integrated in society, especially in the U.S.

“I do not focus on the sales in the next quarter or the next year,” he said. “I focus on the ... hundreds, hundreds, hundreds millions of people who practically live their lives by it [iPhone].”

The biggest headwinds for Apple include increasing competition and market saturation in the U.S. and other developed countries, mitigated somewhat by the growing tech markets of developing countries such as China and India (though the iPhone faces strong competition in China from Huawei, which surpassed Apple in July to become the world’s second-largest smartphone producer). The company managed to dodge some of the negative effects of the U.S.-China trade war by moving the mass production of iPhones from China to India.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.

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