Even Warren Buffett is Struggling This Year
If your portfolio has declined this year, you’re not alone. Even Warren Buffett’s Berkshire Hathaway has fallen 9.0% in 2015, as illustrated in the above chart.
Warren Buffett and his colleague Charlie Munger are probably the greatest investors of our generation. As you can see in the chart, the performance of Berkshire Hathaway (BRK.A) is quite remarkable, but the Oracle of Omaha has struggled and underperformed the market at times.
Do you remember what Mr. Buffett said about the technology craze in the late 1990s? He suggested that technology didn’t make sense in his approach, and that he was skipping the whole thing. At the time, the thinking was “the old bird had lost it,” and that Warren Buffett was done as a leading investor. But sure enough, Mr. Buffett turned out to be right, and after underperforming for a while, Berkshire soon returned to form.
But blue chip stocks and value stocks have not fared well in 2015. The Dow Jones Industrial Average, which contains many of the leading blue-chip stocks, has declined 0.5% thus far in 2015, and the S&P 500 Value Index has declined 3.2%. My Cabot Value Model has dropped 3.9%.
How have the other measures of the market performed? The Nasdaq Composite has produced a gain of 7.1% in 2015, and the S&P 500 Growth Index has climbed 5.8%. These two indicators have fared much better than blue chip and value stocks.
Because of the decline in value stocks, you might be less attentive to my conservative investment approach and Mr. Buffett’s Berkshire Hathaway. However, now is the perfect time to pick up bargain stocks that will outperform in 2016 and beyond!
Blue-chip stocks, such as Cummins, General Motors, IBM, Johnson Controls, Prudential, United Technologies and Whirlpool, are selling at their lowest levels in many years. The average P/E for these five stocks is 11.2 based on last 12-month earnings per share, the average dividend yield is 3.1%, the average PEG ratio (P/E divided by growth) is 0.90, and the average appreciation potential is 33% during the next one to two years. At the current prices, you should not pass them up.
Bargains like these come along only once in a decade!
As Warren Buffett said, “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
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Two Stocks Mr. Buffett Should Own
Two stocks that I think Mr. Buffett should own are Johnson Controls and Whirlpool. Both stocks are undervalued with a sufficient margin of safety, both have high profit margins, and both manufacture products that are easy to understand. Berkshire doesn’t own these stocks yet, but I think he will likely buy big chunks of each stock soon. My suggestion: Buy now before Mr. Buffett drives these stocks substantially higher!
Here’s my analysis on each stock.
Johnson Controls (JCI) operates in three business segments: Buildings, Automotive and Power Solutions. Johnson Controls was founded in 1885 and is headquartered in Milwaukee, Wisconsin.
The Building Efficiency segment (33% of sales) is engaged in designing, producing, marketing and installing heating, ventilating and air conditioning (HVAC) systems, building-management systems, automatic temperature controls, building security and mechanical equipment. Johnson also provides technical services, energy management consulting and property management of entire real estate portfolios.
The company’s Automotive Experience business (51% of sales) provides interior systems using the company’s design and engineering expertise. Johnson supplies seating, interior systems and door systems for more than 30 million vehicles annually.
The Power Solutions business (16% of sales) supplies advanced lead-acid automotive batteries for every type of passenger car, light truck and utility vehicle. The company also makes lithium-ion batteries to power hybrid and electric vehicles.
Johnson recently completed the sale of a fourth division, Workplace, to CBRE Group for $1.5 billion. The company created a 10-year deal with the buyer, CBRE Group, to sell HVAC equipment and building automation systems to CBRE’s property owners. That could be big, as CBRE is the world’s largest commercial real estate services firm serving owners, investors and occupants.
In addition, Johnson will split into two companies sometime in 2016. One company will operate the Automotive segment, and the other company will control the Building and Power Solutions segments. Management is already cutting costs and improving efficiency in preparation for the split. Lastly, the company will likely use part of the $1.5 billion sale proceeds from its CBRE deal to enhance storage battery research and development, and to possibly acquire a company or two to augment the proposed two new companies.
Johnson’s sales will decrease about 10% during the next 12 months because of the sale of its Workplace division. However, EPS will rise 8% to $3.80 during the 12 months ending September 30, 2016. At 12.9 times current EPS with a dividend yield of 2.3%, JCI shares are clearly undervalued after factoring in the firm’s bright prospects.
I expect JCI to reach my Minimum Sell Price target within one year. I recommend buying at the current price.
Undervalued Now, But Set for Big Gains in 2016
Whirlpool (WHR) is the largest manufacturer of home appliances in the world. Whirlpool’s products include laundry appliances, refrigerators and freezers, mixers and cooking appliances and dishwashers. The company’s brand names include Whirlpool, Maytag, KitchenAid, Roper, Jenn-Air and Amana. The company is based in Michigan and was founded in 1955.
Whirlpool’s sales in North America in 2015 are unchanged from a year ago, but profits are advancing due to cost cuts and lower raw material costs. Sales growth in Europe and China is solid, but sales in Latin America fell 27% because of the recession in Brazil. Whirlpool has cut production to keep costs in line with lower sales.
Whirlpool’s acquisition of American Dryer in July is adding meaningful sales and earnings, and offers multiple expansion opportunities. Whirlpool has also entered into a contract to supply Ryan Homes, the nation’s fifth largest homebuilder, with all appliances for new homes. Whirlpool has additional ventures and acquisitions pending.
Sales rose 12% and EPS advanced 11% in the past 12 months ended September 30, 2015, after posting minimal gains in the previous three years. During the next 12 months, sales will rise only 6%, hampered by the severe slowdown in Brazil, but EPS will surge 19% to $14.25, aided by lower raw material costs and strong contributions from American Dryer.
Whirlpool’s stock price has lost 27% during the past eight months, mostly due to flat earnings results in the first half of 2015. EPS growth accelerated in the third quarter, though, and will continue to accelerate during the next several quarters. WHR sells at 13.3 times trailing earnings, its balance sheet is solid and the dividend yield is 2.3% and rising. The company’s return on equity of 16%, a measure of profitability, is also attractive.
WHR will likely climb to my Minimum Sell Price target within one year. I recommend buying at the current price.
I will continue to follow Johnson Controls, Whirlpool, and many other undervalued, high-quality companies in Cabot Benjamin Graham Value Investor.
Until next time, be kind and friendly to everyone you meet.
Sincerely,
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
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