Why This May Be the Perfect Time to Chase Warren Buffett's Largest Stock Picks

Investing

Published: November 16, 2017 8:05 am

Last Updated: January 12, 2020 6:15 am

Two traits are the key drivers in making a buy or sell decision in investing. One is fear and one is greed. After the continued stock market surge of 2017, the greed has won over the fear as this bull market is now nearing its ninth year. That great rally will come to an end one day, but one particular play on words now emulated the greed side of this bull market and then some — FOMO, or fear of missing out!

A problem is emerging now. As of November 2017, some investors are getting concerned that stocks have rallied too much and that the stock market may be ripe for a big sell-off. By November 15, the Dow Jones Industrial Average had sold off by over 300 points in less than a week. Still, it cannot be ignored that investors have become ever richer buying into each and every big market sell-off. That trend has been in place for than five years, and stocks haven’t sold off by 10% for almost two years now.

If investors are scared to be in the market, perhaps following the smartest grandpa strategy might be the best pursuit in a chicken-bull strategy. This would allow those investors who are scared that the market has peaked to also not miss out on the bull market if it keeps charging higher.

When it comes to a smart grandpa strategy, Warren Buffett of Berkshire Hathaway Inc. (NYSE: BRK-A) may be the best person to emulate. After all, Buffett held the world’s wealthiest individual position title for some time. And he’s considered the world’s greatest investor of the modern era. If those titles are both true, this old grandpa has to know more than just a thing or two about investing.

24/7 Wall St. follows many of the so-called whale watching transactions. Quite simply, this is following what the smart money is buying and selling in stocks. We’ve already determined that Buffett is worth watching.

In mid-November of 2017, the markets have risen more than 200% since the March 2009 bottoms. And the post-election rally continued with major steam, with the Dow up over 18% and the S&P 500 up over 15%. Returns of that magnitude just aren’t normal, and the gains are even larger if you go back a full year to election day.

When evaluating if a stock is cheap or expensive, some investors need guidance. They might not understand if a P/E ratio or sales multiple or EBITDA multiple is good or not. This is where investors may start to look at what the pool of analysts has to say as a whole. The Thomson Reuters consensus analyst target price is the average (mean) of all sell-side analysts that are part of its analyst universe. If investors see the stock price trading under the consensus analyst target price, then they might think it’s a cheap stock as far as where the stock price is expected to go by a bunch of “smart” people.

Before thinking you can blindly trust analyst calls entirely, guess again. These are people, and people make mistakes. Sometimes some serious misfortunes pop up out of the blue. And sometimes even the smartest person in the room was working off a less-than-solid thesis.

24/7 Wall St. has perused the top holdings of Buffett by the size of his stake. One thing that stood out a day after Buffett showed which stocks he has been buying and selling is that all the major stocks he held were trading under their consensus analyst price targets. After tracking Buffett for two decades, and after considering the strength of this bull market, let’s just say that it’s not normal to see all the major holdings trading at a discount to what analysts are forecasting as a group.

Investors need to understand that the dollar valuations used for this analysis were based on the end of the third quarter. That being said, the share prices and the consensus target prices used here were used as of November 15. This report does not rank these by whether or not Buffett was buying or selling shares, but by name and value to keep consistency. After all, Buffett often sells a stock only to buy more later.

American Express Co. (NYSE: AXP) was a $13.7 billion stake, and trading at $93.40, it has consensus analyst target price of $95.29. American Express also comes with a 1.5% dividend yield, and it’s about to have a new CEO who might want a revamped strategy. American Express has traded as high as $96.90 in 2017, and its shares were up over 25% so far this year.

Apple Inc. (NASDAQ: AAPL) was a $21.3 billion stake for Berkshire Hathaway, but now its shares have sold off five straight days as profit taking has been seen. Trading at $169.50, Apple has a consensus target price of $186.57. Its 52-week high is $176.24. Even if investors worry that Apple analysts became too positive after earnings, the current share price is still under the $174 consensus target that was seen in October ahead of earnings. Apple’s sell-off has taken some strength out, but Apple was last seen up about 47% this year.

Bank of America Corp. (NYSE: BAC) was a $17.7 billion stake that came after Buffett converted its debt (imagine the tax he would have had to pay!). Shares were last seen at $26.80, with a consensus analyst target of $28.30. The dividend yield is 1.8%, and the 52-week high is $27.98. Shares are up 18% so far in 2017.