By Meena Krishnamsetty and Matt Doiron
In mid-February, Warren Buffett's Berkshire Hathaway BRK.A -0.72% filed its 13F with the SEC, disclosing many of its long equity positions as of the end of December 2012. This information is a bit old, but we have found that even with the delay in 13F filings the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (see the details of our small cap strategy) and of course Buffett is a long-term investor so Berkshire likely still owns most of these stocks. The PEG ratio combines the P/E multiple and analyst expectations for earnings growth in a single quantitative metric, and so can be one way to measure a stock's upside potential if the analysts turn out to be correct. Here are five stocks that Berkshire owned at the end of December with five-year PEG ratios less than 1 (or see the full list of stocks Buffett reported owning):
During the fourth quarter of 2012 Berkshire increased its holdings of DirecTV DTV -0.27% by 15% to a total of over 34 million shares; this represented over $1.7 billion invested in the company at that time. DirecTV's earnings grew strongly in the fourth quarter of 2012 versus a year earlier, and while revenue growth was more limited the stock is fairly cheap at 13 times trailing earnings. Analyst expectations imply a five-year PEG of 0.7. Billionaire Mario Gabelli's GAMCO Investors was another major shareholder of DirecTV, reporting a position of 4.8 million shares.
Buffett and his team kept their holdings of Philips 66 PSX -1.70% , a $43 billion market cap downstream oil and gas company recently spun out from ConocoPhillips COP +0.48% constant between October and December. Many value investors like investing in spinouts because management of the new company may be better able to focus on operations without having to concern themselves with the needs of the larger organization (read more about investing in spinouts). Currently Phillips 66 trades at 11 times trailing earnings and 10 times analyst consensus for 2014, though reported financials have been down.
Berkshire Hathaway was a big buyer of General Motors GM -0.13% last quarter, with the 25 million shares in its portfolio at the end of December representing a 67% increase from three months earlier. GM was one of the most popular stocks among hedge funds during Q4. Some value investors believe that auto makers are poised for strong numbers as (among other factors) U.S. consumers replace their historically aged auto fleet, and Wall Street analysts are also pushing the bull case as GM's forward P/E is only 6. Expectations of continued growth from that point result in a low PEG ratio, as is the case at some other auto makers and auto related companies.
The holding company was also buying National Oilwell Varco NOV -1.92% , a $30 billion market cap oil and gas drilling and production services company, during the fourth quarter of 2012. With drilling activity generally dependent on oil prices and therefore macro conditions, the stock's beta is quite high at 2.2. Revenue and earnings grew at double-digit rates last quarter compared with the fourth quarter of 2011, but the market is pricing in low growth at a trailing P/E of 12. Billionaire T. Boone Pickens was also buying National Oilwell Varco according to his 13F (check out Pickens' stock picks).
Wabco Holdings WBC -2.48% rounded out our list of Buffett's high upside potential picks as the filing disclosed ownership of 4.1 million shares and analyst expectations result in a five-year PEG ratio of 0.8. The auto parts company also has a high beta (at 2.3) and we'd note that net income fell 15% in its most recent quarter compared with the same period in the previous year (revenue was down as well). With trailing and forward earnings multiples in the teens, we would avoid it. Lone Pine Capital, managed by billionaire Stephen Mandel, reported a position of 3.5 million shares.
