Both stocks soared after the legendary investor dumped them. Did he make the right call?
By David Goodboy
Many investors believe Warren Buffett is the greatest long-term investor of all time. With a net worth of more than $60 billion, he is by any measure, an incredibly successful investor.
Following the value-investing teachings of Benjamin Graham and Phil Fisher, Buffett purchases stocks with bright, long-term prospects that produce high returns while maintaining a conservative capital structure.
His stock-picking methods have been so successful, his investment firm, Berkshire Hathaway (BRK.A -1.05%), is one of the most expensive stocks on the street -- and for good reason. Shares have skyrocketed from about $100,000 in September 2011 to more than $150,000 today. This is an astounding 50% return in just under a year and a half.
Obviously, investors would be in good stead to follow Buffett's lead when it comes to stock picking and investment philosophy most of the time. And fortunately, by studying Buffett's quarterly 13F filings, investors can discover what Buffett has bought and sold during the previous quarter.
However, by the time 13F filings are published, they are old. This means you will likely not get as good a price for a stock as Buffett did when he bought or sold it. And this can make all the difference in the world when it comes to profit. In addition, just because a pro like Buffett buys or sells a stock, it in no way reflects the value of the company as an investment.
I like using 13F filings as a guideline, not the end-all authority. For example, if I see Buffett is buying or selling a particular company, I'll make a note to dig deeper into the company to see whether it still makes sense to buy or sell.
After reviewing Buffett's latest 13F filing, I've discovered two of the stocks he dumped during the third quarter of 2012 have continued to provide solid performance. This proves that just because a professional is selling doesn't mean the stock is no longer a good buy.
Here's a closer look at two stocks Buffett recently sold, despite their solid fundamentals...
Johnson & Johnson (JNJ +0.24%)
Until recently, this pharmaceutical maker was one of Buffett's largest holdings. But in 2011, Johnson & Johnson acquired Swiss medical device maker Sythes in a two-third stock and one-third cash deal. Buffett didn't like the purchase, because it diluted the value of Johnson & Johnson's shares.
Buffett waited for the right time, and in the third quarter of 2012, he dumped 95% of his holdings in Johnson & Johnson. This lowered his stake from a little more than 10 million shares to fewer than 500,000. Johnson & Johnson is now one of Buffett's smallest holdings.
What has happened to the stock since then? Well, shares have soared higher from about $68 in November 2012 to more than $76 today. Obviously, Buffett's selling had practically zero negative effect on the stock. Investors who bought shares from Buffett are sitting on at least a 12% return in a very short time.
Not to mention, Johnson & Johnson has a 50-year track record of paying dividends and its $3 billion in cash clearly makes future dividend payments easy to maintain.
Procter & Gamble (PG +0.21%)
Back in October 2012, Buffett announced his concerned about the valuation of this giant consumer product company. He cut back on his holdings by nearly 7 million shares in the third quarter of 2012. However, he still holds nearly 53 million shares of Procter & Gamble, so he is clearly not completely bearish on the stock.
Investors who bought shares of Procter & Gamble in November 2012 are up more than 15% to the present $77.
Perhaps most interesting to this story is the fact that famed activist short-seller Bill Ackman's added more than 4 million shares of P&G during the third quarter of 2012, increasing his stake to more than 34 million shares through his Pershing Square Capital Management.
Ackman has been pressuring the company to increase profitability, and in the fourth quarter of 2012, year-over-year earnings climbed 12% to $1.22 a share. In addition, the company increased 2013 earnings guidance from $3.97 a share to $4.07 a share, a 3% to 6% increase over 2012's earnings.
Risks to consider: Following or fading any professional investor is not a recipe for success. Always do your own due diligence when choosing investments, no matter who is buying or selling.
Action to take: Following the moves of professional investors like Buffett provides a good starting point for your next stock picks. Be sure to look at what the pros are buying and selling, and then add your own research to determine whether the stock makes sense to you. Remember, you shouldn't sell just because a pro does. In fact, it may be a signal for you to buy.
David Goodboy does not personally hold positions in any securities mentioned in this article.
|Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012: A Fortune Magazine Book by Carol J. Loomis|
Buy new: $16.66 / Used from: $11.95
Usually ships in 24 hours
|Warren Buffett's 3 Favorite Books: A guide to The Intelligent Investor, Security Analysis, and The Wealth of Nations by Preston George Pysh|
Buy new: $12.99 / Used from: $16.04
Usually ships in 24 hours