The 4 Value Stocks Charlie Munger Loves Most - Cabot Wealth Network

The 4 Value Stocks Charlie Munger Loves Most

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Charlie Munger has been behind many of Warren Buffett’s biggest successes. So when he says these are his 4 favorite stocks, it’s worth noting.

One of the most successful and well-known investors in the world is Warren Buffett, chairman of Berkshire Hathaway. Not so widely recognized is his investing partner, Charlie Munger. Munger, 97, vice chairman of Berkshire Hathaway (BRK-B), is widely credited with helping make Buffett successful, by converting him from a “cigar butt” investor to one that buys great companies at good prices. With this approach, Berkshire Hathaway has acquired and now holds “forever” public and private companies that have generated one of history’s greatest accumulations of wealth.

Munger is also the chairman of the Daily Journal Corporation (DJCO), a small company that provides California lawyers with valuable legal information. The company’s software business is a leader in the growing industry of automated court reporting. Like Berkshire Hathaway, the Daily Journal Corporation holds public stocks – in its case, $260 million worth, more than half its $450 million market cap.

Each year, Munger presides over the Daily Journal’s annual meeting. At this year’s meeting he shared his insights in a two-hour live-streamed (on Yahoo! Finance) session on value investing, bitcoin, gold, Robinhood, the Chinese economic system, picking a spouse and how his company made so much money after the 2010 financial crisis were among the varied topics.

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Here were some highlights of what Munger said:

  • On value investing: “Value investing… will never go out of style because value investing … is always wanting to get more value than you pay for when you buy a stock. And that approach will never go out of style.”
  • On two approaches to value investing: “Some people look for values in strong companies and some look for values in weak companies.”
  • On GameStop: “… and that is the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would on betting on race horses.”

Interestingly, he wouldn’t be a buyer of his own stock due to valuation: “The Daily Journal stock sells way above the price I would pay if I were buying a new stock.”

Munger said he strongly favors owning only a few stocks, “… which I think I know something about and where I think I have an advantage.” What stocks does Daily Journal currently hold that meet his high standards? Only four, two of which we initially recommended for our Cabot Undervalued Stocks Advisor subscribers last year. All four are listed below (in alphabetical order):

Charlie Munger’s 4 Favorite Value Stocks

Bank of America (BAC) – Under CEO Brian Moynihan since 2010, the bank has fully recovered from the devastating global financial crisis, which nearly ruined it. Today, Bank of America has a strong and diversified mix of businesses including traditional banking, wealth management and capital markets. Credit loss reserves are 2.04% of total loans, while credit losses are running at only 0.38% of loans. Capital is strong, with a risk-weighted capital ratio of 11.9%. The shares trade at 15.7x estimated 2022 earnings.

POSCO (PKX) – This Korean company, launched in 1968, is one of the world’s largest steel producers. The firm is exceptionally well managed and operates two of the most technologically advanced steel mills in the world. POSCO exports 63% of its production as its low cost and high quality make it globally competitive. The company’s balance sheet is sturdy, with cash nearly offsetting its total debt. PKX shares trade at 3.9x EV/EBITDA and 10.7x estimated 2022 earnings.

U.S. Bancorp (USB) focuses on traditional banking and wealth management. Unlike other majors, the company has almost no capital markets operations. The experienced and conservative leadership oversees its high quality and low-risk business model, including its under-appreciated payment services business. U.S. Bancorp has a 9.7% capital ratio that is bolstered by robust reserves at 2.7% of loans. The shares trade at 15.4x estimated 2022 earnings.

Wells Fargo & Company (WFC) never fully recovered from the 2009 financial crisis, made worse by a loose compliance culture that led to numerous reputation-tarnishing problems. Like all banks, Wells Fargo is struggling with low interest rates and the potential for high credit losses from the pandemic-weakened economy. However, under new CEO Charlie Scharf, the bank is aggressively overhauling its entire operation, most recently with the planned sale of its asset management business. The shares carry considerably more risk than Daily Journal’s other banking stocks, but also trade at a lower valuation of 15.5x estimated 2022 earnings.

The Cabot Undervalued Stocks Advisor portfolio no longer holds positions in these four stocks, but to see the double-digit winners we have in our portfolio, click here.

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Undervalued Stocks Expert Bruce Kaser

Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!

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*This post has been updated from an original version.


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