Top Guru-Owned Stocks Trading at a Discount

A look at well-moated guru holdings trading at low price-earnings ratios

Apr 20, 2020

With the S&P 500 down approximately 12% year to date as of April 20 and another drop potentially in the cards as companies release their first-quarter earnings, many value investors are looking to limit losses and identify bargain opportunities.

However, when volatility is high, speculators are more likely to get burned. During times when the economy is in turmoil, investors looking to allocate capital may want to follow the advice of Warren Buffett (Trades, Portfolio), one of the most successful and famous value investors of all time. Buffett famously said, "Our favorite holding period is forever," referring to how the ideal investment should be ones that can stay in your portfolio for a decade or more.

According to the GuruFocus All-in-One Screener, a Premium feature, the following companies are trading at a price-earnings ratio of below 15 and are in the portfolios of at least 25 investing gurus, indicating that they could provide long-term value opportunities.

Comcast

Comcast Corp. (CMCSA, Financial) is a telecommunications company based in Philadelphia. By revenue, it is one of the largest broadcasting and cable TV companies in the world. Other products include home phones and phone plans, films, television programs (NBC, Telemundo, CNBC, SyFy, etc.) and residential cable communications (Xfinity).

On April 20, shares of Comcast traded around $37.26 for a market cap of $169.42 billion and a price-earnings ratio of 13.15, which makes it undervalued according to the Peter Lynch chart.

According to GuruFocus data, 35 gurus own shares of Comcast, including Diamond Hill Capital (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

GuruFocus gives Comcast a financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10. The Altman Z-Score is 1.51, the three-year revenue growth rate is 12.6% and the three-year Ebitda growth rate is 11%.

Like most cable companies, Comcast continues to see its customers cut the cord, but it is in the process of transitioning to streaming and wireless services. “Video is still an important and profitable component of most of our relationships, but we continue to be disciplined and are not chasing unprofitable subscribers,” Chief Financial Officer Mike Cavanagh said about the matter.

Comcast has seen growth primarily in its internet and connectivity segments, with monthly data usage more than doubling over the past three years and customers sometimes connecting 20 or more devices using Comcast products.

Berkshire Hathaway

Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) is the Omaha, Nebraska-based business conglomerate run by Buffett and Charlie Munger (Trades, Portfolio). Originally purchased as a textile company by Buffett, the business quickly scrapped textile operations and moved into other areas of business. Now, it is primarily involved in insurance, railroads and energy, along with dozens of smaller businesses such as See’s Candies and Precision Castparts.

On April 20, Berkshire Hathaway’s class B shares traded around $188.75 apiece for a market cap of $455.72 billion and a price-earnings ratio of 5.62, which makes the stock undervalued according to the Peter Lynch chart.

According to GuruFocus data, 32 gurus own Berkshire Hathaway class B shares, including Barrow, Hanley, Mewhinney & Strauss, Chuck Royce (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio), while 22 gurus own Berkshire Hathaway class A shares, including Tom Gayner (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).

Berkshire Hathaway has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio is 0.62, the net margin is 24.88% and the three-year revenue growth rate is 13.8%.

One important thing to note is that due to a change in accounting regulations, the revenue and net income of any business with a significant amount of capital allocated to stocks (including Berkshire Hathaway) will be skewed. As of 2018, businesses must report unrealized gains and losses as part of their income, meaning that earnings will largely follow the equity portfolio for these companies. Buffett wrote about this issue in his 2019 letter to shareholders:

“Berkshire’s 2018 and 2019 years glaringly illustrate the argument we have with the new rule. In 2018, a down year for the stock market, our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019, rising stock prices increased net unrealized gains by the aforementioned $53.7 billion, pushing GAAP earnings to the $81.4 billion reported at the beginning of this letter. Those market gyrations led to a crazy 1,900% increase in GAAP earnings!”

Booking Holdings

Based in Norwalk, Connecticut, Booking Holdings (BKNG, Financial) is a world leader in online travel services, providing booking services for everything from flights and cars to hotels and vacation packages.

On April 20, shares of Booking Holdings traded around $1418.42 for a market cap of $58.28 billion and a price-earnings ratio of 12.72. The Peter Lynch chart indicates that the stock is trading below its intrinsic value.

According to GuruFocus data, 29 gurus own shares of Booking Holdings, including Louis Moore Bacon (Trades, Portfolio), Smead Value Fund (Trades, Portfolio), Steven Romick (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).

GuruFocus gives Booking Holdings a financial strength rating of 6 out of 10 and a profitability rating of 10 out of 10. The Altman Z-Score is 5.78, the return on capital is 517.37% and the three-year revenue growth rate is 17.3%.

Compared to Expedia Group (EXPE), which is the most famous travel booking site in the U.S., Booking Holdings focus on the more fragmented European and Asian hotel markets, which more frequently need to turn to booking sites to attract customers. Booking Holdings also focuses more on hotel bookings than airline bookings, as hotel bookings are usually more profitable.

CVS Health

CVS Health Corp. (CVS, Financial) is a health care company that owns the CVS Pharmacy retail pharmacy chain, as well as Aetna (a health insurance provider), CVS Caremark (a pharmacy benefits manager) and several smaller operations. It is headquartered in Woonsocket, Rhode Island.

On April 20, shares of CVS Health traded around $62.34 for a market cap of $81.39 billion and a price-earnings ratio of 12.26. The Peter Lynch chart indicates that the company is trading slightly below its intrinsic value.

According to GuruFocus data, 25 Gurus own shares of the company, including Jeff Auxier (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Caxton Associates (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Charles Brandes (Trades, Portfolio).

CVS Health has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The cash-debt ratio is 0.09, the operating margin is 4.87% and the three-year revenue growth rate is 6.1%.

CVS’s advantages over other pharmacy chain stocks such as Walgreens (WBA) are its innovations and its Aetna health insurance arm. With innovations such as HealthHUB stores, which offer health care services and technology solutions, CVS has an industry reputation of bringing new resources to its customers.

However, in the end, its pharmacy business is extremely similar to that of Walgreens, with both companies offering similar discount programs, flu shot services, groceries, drug prices, etc. The company arguably gains more of an edge from Aetna, which, according to CEO Larry Merlo, serves as part of its plan to build “natural hedges” into its business model. For example, flu season is a headwind for Aetna but a tailwind for pharmacy stores.

Big banks

There are quite a few U.S. banks trading below a price-earnings ratio of 15 and bank stocks have long been a popular component of large investing firms. With a Shiller price-earnings ratio of 15.2 as of April 20, the financial services sector in general has seen its valuation plummet, with only the energy sector trading lower.

It should be noted that financial services stocks, including banks, tend to trade at lower price-earnings ratios that most sectors. Nevertheless, as of April 20, JPMorgan Chase & Co. (JPM, Financial) trades at a price-earnings ratio of 10.43 per share and is owned by 33 Gurus, while Wells Fargo & Co. (WFC, Financial), another large U.S. bank, trades at a price-earnings ratio of 9.75 and is owned by 42 gurus. Bank of America Corp. (BAC, Financial) has a price-earnings of 9.11 and is owned by 37 gurus, while Citigroup Inc. (C, Financial) has a price-earnings ratio of 6.04 and is owned by 30 gurus. With the exception of years with net losses, this is the lowest that big bank stocks have traded since the 2008 financial crisis.

Two major macroeconomic factors that are set to hit the banking industry are the economic downturn in the short term and lower interest rates in the long term.

For example, JPMorgan set aside an extra $6.8 billion in reserve funds in anticipation of a wave of credit and loan defaults as business and individuals take on additional loans to weather the economic crisis. Many other banks in the U.S. have been setting aside reserve money for loan defaults as well. Increasing the reserve funds for credit losses accounted for a loss of $1.99 per share during JPMorgan’s 2020 first quarter. CEO Jamie Dimon said the following in a statement:

"In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8 billion, resulting in total credit costs of $8.3 billion for the quarter.”

In the long term, although the Federal Reserve ostensibly raises interest rates every time the economy recovers and lowers them during recessions, there has been a general downwards trend over time. For the first time in history, the U.S. has entered a recession with an interest rate of zero, when in the past, the base interest rate going into periods of recession was at least 5%. This points towards a potential restructuring of the way banks earn their money if they are unable to charge much interest on their loans going forward, and investor uncertainty only contributes to selloffs.

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 research or consult registered investment advisors before taking action in the stock market.