The Stocks Warren Buffett May Have Bought During Oct. 1 Sell-off

Published on GuruFocus.com on Oct. 14, 2014

In an interview with CNBC on Oct. 2, Warren Buffett mentioned that he bought new stocks during the market sell-off the day before. The Dow Jones was down 1.4%, and the NASDAQ 1.6%. Nearly all of the stocks in the Dow 30 were in the red.

The move shouldn’t be surprising for anyone who follows Buffett’s activities. It was the perfect time for the investor to purchase stocks of good companies at a discount. Unfortunately for his followers, Buffett didn’t name any of the stocks he purchased, and it will be at least two weeks before any filings are required. However, Buffett did say that the company names would be recognizable.

Buffett’s investment philosophy is simple — buy stocks of well-run companies with good management at a discount. Here, we speculate what those stocks could be, including companies he already owns and possible new buys.

Suncor Energy (SU)

In his portfolio dated June 30, Buffett owns 16,458,330 shares of Suncor at an average price of $31.58 per share. He has held shares in the company since the second quarter of 2012.

Suncor is a Canadian oil company that produces a number of refinery feedstock, diesel fuel, and by-products by developing its resource leases in the Athabasca oil sands in Alberta. The company also acquires, develops, and markets crude oil and natural gas.

On Oct. 1, Suncor was trading at $35.83; the stock had been declining since about Aug. 29.

Looking at the company’s Peter Lynch chart, Suncor’s earnings line recently rose above the price level, indicating the stock may be undervalued. Buffett may have chosen to add to his shares while Suncor was a slight bargain.

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The company is in good shape, with steadily increasing gross profit and comfortable gross margin. Suncor also paid off about 7% of its long-term debt in FY 2013.

The current P/S ratio is 1.3.

But what may be most enticing about Suncor is its dividend yield of 2.6%, which is close to the company’s 10-year high. The five-year dividend growth rate is 22.2%. The most recent quarterly dividend was on Sept. 2 at $0.28 per share.

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Other gurus who own Suncor shares include Ken Heebner (Trades, Portfolio), Steven Cohen(Trades, Portfolio), and Jeremy Grantham (Trades, Portfolio).

Liberty Media Corporation (LMCA)

Buffett owns 4,000,000 shares of Liberty Media, which is 1.17% of shares outstanding. He sold shares on two occasions in the past five years at an average price of $46.46 per share.

Liberty Media’s subsidiaries include Sirius XM, Atlanta National League Baseball Club, and TruePosition. The company also has minority equity investments in Time Warner, Time Warner Cable, and Viacom.

The company’s Peter Lynch chart shows that the earnings line has always been above the price, suggesting Liberty Media may be undervalued.

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Liberty Media is currently trading at $43.15; its DCF fair valuation is $83.79, giving a 49% margin of safety. Buffett may be adding to his position in Liberty Media when both the DCF and Peter Lynch metrics suggest the stock is undervalued.

Gross profit has been continuously increasing and recorded at $2,668 million in FY 2013, while gross margin was 66.67% for the same year. Long-term debt nearly doubled from FY 2012 to FY 2013, but the company’s total assets still cover total liabilities.

Murray Stahl (Trades, Portfolio) owns the largest percentage of shares outstanding at 1.32%, while Buffett holds the second largest. Other gurus who own Liberty Media stock include Chase Coleman (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), and Chris Shumway (Trades,Portfolio).

Kellogg (K)

Kellogg currently has a high business predictability rating and may be undervalued according to its Peter Lynch chart. This places the company as a possible contender of new companies in Buffett’s portfolio.

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Kellogg is a worldwide manufacturer and marketer of cereals and convenience foods such as cookies, crackers, and pastries. It manufactures products in 18 countries and sells them in more than 180 countries. Some of its brands include Keebler, Cheez-It, Murray, and Famous Amos.

The stock price has been in decline since about Aug. 29 when it was trading at $64.97. During the sell-off on Oct. 1, the price closed at $60.65.

Kellogg’s dividend yield is 3.1%, while the five-year growth rate is 5.9%. Its most recent quarterly dividend was $0.49 per share paid on Sept. 15.

The company’s P/E ratio is currently 11.8, which is near the 10-year low of 11.64.

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Kellogg’s CEO is John Bryant, who has held the top position since July. Bryant joined Kellogg in 1998, and has held several executive positions including CFO, COO, and both president of North America and International.

Hotchkis & Wiley owns 0.66% of Kellogg’s outstanding shares, followed by Richard Pzena(Trades, Portfolio) at 0.38%, and Mario Gabelli (Trades, Portfolio) at 0.25%.

Aetna (AET)

Aetna is another high business predictability company that may be undervalued according to its Peter Lynch and DCF valuations. Healthcare currently comprises only 2.7% of Buffett’s portfolio.

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Aetna serves about 36 million people and offers a wide range of health insurance products and services. Its three business segments are health care, group insurance, and large case pensions.

The company’s current price is $78.27; its DCF fair valuation is $88.30, giving an 11% margin of safety.

Aetna’s CEO since 2010 is Mark Bertolini, who joined the company in 2003 and was previously head of Specialty Products. In 2007, he was named president and was responsible for all business operations.

The current P/E ratio is 13.6, which is largely on par with the industry median.

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Gross profit increased by about 18% to $12,048 million from FY 2012 to FY 2013. Gross margin was 25.47%.

The company’s dividend yield is a low 1.13%, but the five-year growth rate is an impressive 142.4%, higher than 87% of the companies in the health plans industry. Its share buyback rate is 5.3%.

John Paulson (Trades, Portfolio) owns 2.25% of shares outstanding, followed by Vanguard Health Care Fund (Trades, Portfolio) at 2.03%, and Larry Robbins (Trades, Portfolio) at 0.98%.

Wells Fargo (WFC)

Wells Fargo is a long shot because its stock price is at a premium — $50.20 compared to Buffett’s average purchase price of $30.24 per share. However, it’s clear that Buffett is a Wells Fargo fan, since the company comprises 22.6% of his portfolio.

What leans in Wells Fargo’s favor is that its dividend yield is 2.6% and close to the three-year high. Its five-year growth rate is a very high 35.9%.

Other gurus who own Wells Fargo include Chris Davis (Trades, Portfolio), James Barrow(Trades, Portfolio), and Ken Fisher (Trades, Portfolio).

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