Investment Opportunities

Investigating Warren Buffett’s New Top Five Stocks

On August 30, Bill Gates publicly wished Warren Buffett a happy 90th birthday.

In doing so, he shared one of the most important lessons he has learned from Buffett: what friendship is all about.

As Buffett himself put it…

You will move in the direction of the people that you associate with. So it’s important to associate with people that are better than yourself.

The friends you have will form you as you go through life. Make some good friends, keep them for the rest of your life, but have them be people that you admire as well as like.

Personally, I’ve never met Warren Buffett. He has no idea who I am. But long ago, he became a very important friend of mine.

For more than 20 years, I’ve devoured his every word. His wisdom has shaped who I am as an investor, husband and father. I regularly pass his approach to life – which involves integrity, rational thinking and finding joy in what you do every day – on to my kids.

I can’t imagine a greater purpose for life than what Buffett is doing in building a huge fortune and then giving 99% of it back to society. Happy birthday, Warren!

The Oracle of Omaha’s Birthday Purchase

To celebrate this monumental birthday, Buffett announced that his company, Berkshire Hathaway (NYSE: BRK-B), had purchased shares of five Japanese trading companies.

Japanese trading companies are conglomerates that import everything from metals and energy to food and textiles. These companies play a key role for Japan, which is a resource-scarce, heavily populated island.

It is an unusual investment for Buffett, who has rarely invested in Japan.

The companies are Itochu (OTC: ITOCY), Marubeni (OTC: MARUF), Mitsubishi (OTC: MSBHF), Mitsui (OTC: MITSF) and Sumitomo Mitsui Financial Group (NYSE: SMFG).

Buffett also specifically stated that Berkshire Hathaway’s intention is to hold its Japanese investments for the long term and increase its holdings going forward.

As with all of Buffett’s larger investments, it is worth digging into the details…

A quick look into these five Japanese trading companies, and the answer jumps right out.

They all exhibit these same four investment merits…

  1. They’re cheap. As a group, these five stocks are trading well under book value. (Book value is how much their net assets are worth.) Only Itochu trades above book value, and that is because it has a whopping $6.1 billion of cash on its balance sheet.

Chart - Price-to-Book: Warren Buffett's Five New Stocks

  1. They’re safe. These companies have all made a huge effort to dramatically improve their balance sheets over the past decade and now sit in strong financial positions.

  2. They generate gobs of free cash flow. Combined, the free cash flow yield on these stocks is more than 10%. Free cash flow is the amount of cash they generate that can be returned to shareholders through dividends and share repurchases.

  3. They pay dividends. These payouts now range from 3.1% to 5.7%.

When you put these factors together, you can see the attractiveness of this group. This is a classic Buffett-style investment that combines value, safety and mountains of free cash flow.

Sounds like a strong way to celebrate 90 to me…

Good investing,

Jody


About

Jody Chudley is a Contributing Analyst to Wealthy Retirement. He is a qualified accountant with two decades of experience in the international banking and hedge fund industries as a financial analyst.
His background in finance has made him an expert in deciphering financial statements and uncovering deep value and income opportunities. He has written for various websites and financial magazines with a focus on the resource sector and contrarian investment opportunities.

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