Warren Buffett (Trades, Portfolio)’s market indicator stood at 137.4% at market open May 4, the day before Berkshire Hathaway Inc.’s (BRK.A, Financial)(BRK.B, Financial) annual shareholder meeting. Even though the U.S. market remains significantly overvalued, Buffett still invests in undervalued predictable companies, including Apple Inc. (AAPL, Financial), Wells Fargo & Co. (WFC, Financial), Southwest Airlines Co. (LUV, Financial) and Torchmark Corp. (TMK, Financial).
Buffett’s market indicator still near 10-year highs
As of 11:30 a.m., the Wilshire 5000 index is approximately 1.374 times greater than the U.S. gross domestic product. Based on this market level, the U.S. market is expected to return -1.50% per year over the next eight years. Figure 1 shows the historical trend of the total market index and GDP while Figure 2 shows the historical trend of the ratio.
Figure 1
Figure 2
As illustrated in Figure 3, the predicted and actual returns chart considers three scenarios: a pessimistic case (green line) where the Buffett indicator averages around 40%, an optimistic case (red line) where the Buffett indicator averages around 120% and the expected case (blue line) where the Buffett indicator averages around 80%.
Figure 3
Undervalued predictable strategies still outperform the benchmark
Both the undervalued predictable strategy and the Buffett-Munger strategy have outperformed the Standard & Poor’s 500 index benchmark since their 2009 inception: the former returned 220.08% while the latter 174.76% over the nine-year period.
Buffett mentioned in a 1989 shareholder letter that “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” The co-managers of Berkshire list four key criteria for value investing: understandable business, predictable earnings, good economic moat and attractive price.
Our Forum users have shared key insights about key characteristics of Buffett-Munger companies, including economic moat and intrinsic value based on the discounted cash flow model. GuruFocus defines an undervalued predictable company as one that not only has predictable revenue and earnings growth, but also trades below intrinsic value.
Buffett discloses additional 75 million share investment in ‘undervalued predictable’ Apple
We're told, Apple CEO Tim Cook is “thrilled” to have Buffett as a major investor, adding that Cook “has always been grateful” for Buffett’s insight and advice. Buffett announced in an interview that he invested an additional 75 million shares in the Cupertino, California-based company, increasing Berkshire’s stake to approximately 240 million shares.
Berkshire Hathaway bought 75 million shares of Apple in Q1 from CNBC.
Apple’s share price increased 3.25% to $182.63 by 11:30 a.m. on news that Buffett is increasing his stake in the company. Even though the company trades near a 10-year high, Apple is still undervalued based on the discounted earnings model as Figure 4 illustrates.
Figure 4
GuruFocus lists two positive investing signs for Apple, including consistent revenue growth and a strong Piotroski F-score of 7. Apple’s business predictability ranks a good 2.5 stars out of five based on its historical revenue and earnings trends illustrated in Figure 5.
Figure 5
See also
Other top undervalued stocks in Buffett’s current portfolio include Southwest and Torchmark, with 70% and 64% margin of safety.
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Disclosure: no positions.
