Warren Buffett’s Stock Buffet

This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

If you were to assign human characteristics to the stock market — reasonable since it is the sum of its participants’ thinking — it’s an idiot savant. Unbelievably skilled at ferreting out (and punishing) greed and less than reasoned speculation, but then at times missing the writing on the wall.

When that happens, it takes an outsider to come in and show the market what it is missing. One such moment happened on Valentine’s Day this year, when Warren Buffett announced he would acquire food company H.J. Heinz (HNZ) with 3G Capital for $72.50 a share.

Just before the deal was announced, HNZ was trading at $60.48, or about 17 times the April 2013 consensus earnings per share forecast of $3.55. Buffett’s $72.50 bid valued the company at 20.4 times the forecast.

I don’t know what Buffett’s thesis is per se, but his valuation estimate is interesting and instructive. Specifically, since he doesn’t chase companies that lose money and he only invests in companies that generate increasing amounts of cash over time, I think he’s posited, and put his money where his posit is, that money can be made today and in the future by paying $20 for a dollar of earnings.

Buffett’s speculation has been well digested in the market since there has been an across-the-board jump in the multiple for food companies, as the chart below demonstrates.

Since demand for food will never, ever go away, I recommend taking a look at the food companies listed above, and initially nibbling at them. I say nibbling because I feel food companies still offer good value today, but given the volatile, jumpy nature of our markets I feel additional entry points will present themselves.

Another by-product of dealing in the most necessary of all products is that food companies tend to throw off a lot of cash.

For instance, sticking with General Mills (GIS) for the moment, the company has been a stellar dividend payer and grower. Right now the yield is a healthy 3.1%.

More important, over the past 10 years GIS has grown its dividend from 55 cents per share to the current $1.55 share, for a very heady compound annual growth rate of 10.7%. Similarly, J.M. Smucker Company (SJM), yielding 2.1%, has also grown its dividend by 10.7% over the past 10 years, far outpacing inflation.

Below are the food companies we like, with the associated earnings date in case you want to tune in. Note Kimberly-Clark (KMB), which released earnings Friday showing higher profit and also raised its forecast.

General Mills (GIS), June 26
Procter & Gamble (PG), April 24
Kimberly-Clark (KMB), April 19
Kraft Foods (KRFT), May 2
Kellogg Company (K), May 2
Hershey (HSY), April 25
J.M. Smucker (SMJ), June 6
Dr Pepper Snapple Group (DPS), April 24
Green Mountain Coffee Roasters (GMCR), May 8
Dean Foods (DF), May 9

The GMG Defensive Beta Fund, which I co-manage, owns the following stocks on the list above: PG, K, KMB, GIS

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