Should You Bet on
Warren Buffett?
by Jondavid Klipp
Executive Wealth Advisory
Seems
like Warren Buffett, chairman of Berkshire Hathaway, is making more news
than ever these days. First, he shocked the investment community with his
reported $1 billion purchase of silver. Then, he reportedly started scooping
up depressed Nike shares. With an astounding 36-year track record of being
right far more than wrong, Buffett is hard to ignore.Many
individual investors would love to take advantage of Buffett's investment
acumen, but they aren't willing to pay the high premium for Berkshire shares
(currently trading at $55,400). After all, it's estimated that Berkshire
shares are trading at more than a 25 percent premium to the underlying investments
the company holds. A better way might be to construct your own Buffett look-alike
portfolio by investing in the master's favorites when they dip to attractive
prices. Here are six stocks Berkshire is known to hold, as well as a look
at one (Nike) it's rumored to be buying.American
Express (NYSE AXP $90), founded
in 1850, provides its credit cards and travelers checks through 1,700 offices
in more than 160 countries. In addition, Minneapolis-based American Express
financial Advisors (formerly IDS Financial Services) sells financial products
ranging from mutual funds to annuities.Every
time one of its 40 million holders uses an American Express card, AXP benefits.
Over the past five years, the company has significantly expanded the range
of merchants who accept its cards and is slowly gaining market share.AXP
is expected to increase earnings by 14 percent in 1998 to $4.75 per share.
Over the next five years, earnings per share should increase at about 13
percent annually. Berkshire Hathaway owns 10.5 percent of outstanding shares
of AXP and the Fidelity funds own another 10.1 percent -- not bad company
to join. We rate these shares a Buy at $85 and below.Coca-Cola (NYSE KO $68-5/8) recently raised its quarterly
dividend to $0.15 per share from $0.14, giving it an annual dividend yield
of 0.9 percent. Coca-Cola is the world's largest soft drink company and
probably has the best brand recognition of any product in the world. Its
major brands include Coca-Cola, Sprite, Fanta and Tab. Foreign operations
account for more than 65 percent of sales and profits. Over the past 10
years, Coca-Cola has increased revenues by an average of 11 percent annually,
while earnings have grown 18 percent per year.Berkshire
Hathaway owns 200 million shares of Coca-Cola, or 8.1 percent of the total
shares outstanding. At $68-5/8, the stock is selling at 41 times estimated
1998 earnings of $1.68 per share. That's far from cheap. We recommend
investors wait for these shares to fall below $50 before making a purchase.Disney (NYSE DIS $112) operates Disneyland, Walt Disney
World (Magic Kingdom, Epcot Center, Disney-MGM Studios) and the ABC TV and
radio networks. It also produces movies and owns The Disney Channel, ESPN,
A&E and Lifetime TV. Finally, Disney earns royalties from Tokyo Disneyland
and owns 39 percent of Euro Disney in France.Warren
Buffett has owned shares in Disney since the '60s and currently has 24.614
million shares through Berkshire Hathaway. The company has continually found
new ways to merchandise its invaluable name and cartoon characters. The
Disney Cruise Line will begin operations when its first ship, The Disney
Magic, is launched this spring. Recent movie hits include "George of
the Jungle," Toy Story" and a remake of "101 Dalmatians."
On Broadway, a stage version of the blockbuster movie, "The Lion King"
has met with success.Over
the past 10 years, Disney's revenues and earnings have increased 20 percent
and 22 percent, respectively. Despite our admiration for Disney, the company's
stock is no bargain. Based on an earnings estimate of $3.20 per share for
the fiscal year ending September 1998, Disney stock trades at a P/E multiple
of 35. We recommend purchase only if Disney shares fall below $90.Gillette (NYSE G $108) is the leading maker of razors.
Warren Buffett has said his confidence in Gillette is bolstered by the fact
that every day roughly half of the population shaves its face. Gillette's
razors include Sensor, Trac II and Good News.In
addition to razors, Gillette has a stable of other brand-name consumer products,
such as Right Guard antiperspirant, Paper Mate pens, Oral-B toothbrushes,
and Duracell batteries. Over the past 10 years, Gillette has increased revenues
by an average of 12 percent annually, while earnings have grown 18 percent
per year. Most recently, the company announced its dividend was being raised
19 percent to an annual rate of $1.02 per share from $0.86 per share.Berkshire
Hathaway owns 8.6 percent of the outstanding shares of Gillette. This stock
is not cheap; it currently sells at 36 times estimated 1998 earnings of
$2.98 per share. If the stock were to fall to $75 or below, we would
recommend purchase. (Note: Gillette stock is scheduled to split
two-for-one in May.)McDonald's
Corp. (NYSE MCD $54-1/2) serves,
on average, more than 38 million people each day. The company is the largest
and best-known restaurant in the world, with more than 23,500 locations
in 109 countries. In 1997 alone, McDonald's opened 2,110 new restaurants.Despite
its dominance, McDonald's has fallen on hard times. New products such as
the Arch Deluxe and forays into pizza and veggie burgers have floundered
and competitors such as Burger King and Wendy's have gained market share.In
1996 Berkshire Hathaway purchased 30.2 million shares of McDonald's at an
average cost of $41.95 per share. Since then, McDonald's shares have increased
only 30 percent. That means you can pick up shares, two years later, at
prices not that far off from where Warren Buffett bought them. In addition,
McDonald's is among the cheaper stocks Buffett owns, trading at a reasonable
22 times estimated 1998 earnings of $2.52 per share.We
rate shares of MCD a Buy at $55 and below. In the long run, McDonald's strong brand name and dominant market
position will help get the company and its stock back on track. The company
recognizes the value of its stock and invested $765 million to repurchase
16.2 million MCD shares in 1997.Nike (NYSE NKE $43-7/8) has a strong brand name, an
impressive history of earnings growth and a current bargain stock price
that would seem to support speculation that Berkshire Hathaway has been
accumulating NKE shares.The
stock has lost nearly half its value since peaking at $76 in February 1997.
The drop is the result of slumping sales in Japan and the U.S. that have
caused Nike to reduce its prices to eliminate inventory gluts. In response,
Nike says it will soon announce a global cut in its work force. Nike employs
a total of 21,800 people.Despite
the setback, Nike, which spends over $1 billion per year in advertising,
is still one of the most recognizable brands in the world. The company continues
to bring new shoes to market and is focusing on golf, women's sports, soccer,
basketball and running.At current prices, the stock sells at a reasonable 22 times estimated fiscal 1999 (ends May 1999) earnings of $2.01 per share. We rate shares of NKE a Buy at $45 and below.
Washington Post (NYSE
WPO $493-1/2) publishes The Washington Post, which has a daily circulation
of about 815,000 and a Sunday circulation of 1.2 million; Newsweek
magazine, which has a circulation of 3.1 million; and 21 weekly community
newspapers in Maryland with an aggregate circulation of 330,000. It also
owns 6 network-affiliated TV stations and 53 cable-TV systems with 968,000
subscribers.Berkshire
Hathaway bought 1.728 million shares of Washington Post in 1973 and has
held them ever since.Over
the past 10 years, Washington Post has increased sales and earnings an average
of 7 percent and 9 percent, respectively.Warren
Buffett, who serves on the Washington Post's board of directors, considers
the company to have a top brand name in both The Washington Post
and Newsweek. The company also throws off a lot of recurring income
from patrons of both its print and television operations.Shares of Washington Post trade at a moderate 21 times estimated earnings of $23.51 per share and yield 1.0 percent. We recommend purchase at $450 and below.
Editor's Note: Jondavid Klipp is a contributing writer to Executive
Wealth Advisory, 1750 Old Meadow Rd., Ste., 302, McLean, VA 22102, 1 year,
12 issues, $125.