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James Li
James Li
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3 Reasonably Valued Stocks Warren Buffett and Bill Nygren Agree On

Stocks are trading between 70% and 110% of GF value

According to the All-in-one Screener, a major Premium feature of GuruFocus, three stocks that Warren Buffett (Trades, Portfolio) and Bill Nygren (Trades, Portfolio) agree on and trade at reasonable levels based on their GF Value Line are Bank of America Corp. (NYSE:BAC), American Express Co. (NYSE:AXP) and General Motors Co. (NYSE:GM).


Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio) said that he looks for four key criteria: an understandable business with favorable long-term prospects that is operated by honest and competent people and available at an attractive price.


Likewise, Nygren and his partners at Oakmark Funds believe that over time, the stock will reach the value of the underlying company. Oakmark emphasizes several other key characteristics, including intelligent use of free cash flows and manager ownership. The managers of the Chicago-based fund view each purchase as buying a piece of the business and not just a stock certificate.


As such, the two value investors have several holdings in common: The Screener listed nine common holdings as of the June-quarter filing. Figure 1 gives a screen shot illustrating the Screener inputs.

Figure 1

GF Value Line measures degree of undervaluation or overvaluation

According to the new feature announcement, the GF Value Line measures the degree of undervaluation or overvaluation based on the website's unique method, which considers a company's historical valuations, an internal adjustment factor based on a company's past returns and growth and future estimates of business performance. Figure 2 illustrates a sample GF Value Chart for Apple Inc. (NASDAQ:AAPL), a company that Nygren's firm sold out of during the second quarter but represents over 44% of Berkshire's equity portfolio as of June.


Figure 2

As Figure 2 illustrates, Apple's share price is off the charts, i.e., significantly above the dark red section. The Cupertino, California-based tech giant has a price-to-GF-Value ratio of 1.87 as of Wednesday, suggesting significant overvaluation.

On the other hand, companies with a price-to-GF-Value ratio less than 0.9 are undervalued, while companies with a price-to-GF-Value ratio between 0.9 and 1.1 are fairly valued. However, if the price-to-GF-Value ratio is too low, for example, less than 0.7, investors may need to monitor a company's financial strength and profitability measures to avoid possible value traps.

According to the Screener, three of Buffett and Nygren's common holdings have a price-to-GF-Value ratio between 0.7 and 1.1, suggesting reasonable valuation.

Bank of America

According to Aggregated Portfolio statistics, another Premium feature of GuruFocus, Berkshire and Oakmark have a combined weight of approximately 18% in Bank of America. The Charlotte-based bank is Oakmark's fourth-largest holding despite occupying just 3.35% of the equity portfolio. On the other hand, Berkshire has expanded its holding in Bank of America to 14.57% as of Aug. 4 according to GuruFocus Real-Time Picks, another Premium feature of the website.


GuruFocus ranks Bank of America's valuation 5 out of 10: Price-to-free-cash-flow and price-to-operating-cash-flow ratios are outperforming over 62% of global competitors despite price-book and price-sales ratios underperforming over 66% of global banks.


Bank of America is modestly undervalued based on a price-to-GF-Value ratio of 0.78.


American Express

Berkshire and Oakmark have a combined weight of 8.87% in American Express.


GuruFocus ranks the New York-based credit card company's valuation 3 out of 10 on the back of price valuations underperforming over 70% of global competitors, with price-book ratios underperforming over 91% of global credit service companies. Despite this, American Express is still deemed fairly valued according to the website's own valuation method, with a price-to-GF-value ratio of 0.91.


General Motors

Berkshire and Oakmark have a combined weight of 2.88% in General Motors.


GuruFocus ranks the Detroit-based automaker's valuation 3 out of 10 on the back of price-earnings ratios underperforming over 62% of global competitors. With a price-to-GF-Value ratio of 1.07, GM is considered fairly valued yet slightly overvalued.


Disclosure: The author is long Apple. Except for Berkshire's holding in Bank of America, the mention of holdings in this article reflect information as of the June-quarter filing and do not include any trades Buffett and Nygren made during the third quarter.

Per Securities and Exchange Commission regulations, quarterly trades are due 45 days after the quarter ends, except when the trades are made in companies where the guru has over 5% of shares outstanding. Real-time trades are due after 10 days after the transaction is made.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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