Warren Buffett Just Poured Millions into These 3 Off-the-Radar Stocks

James Brumley's picture

Friday, May 18, 2012 - 5:21pm

by James Brumley

If you're a fan of investment genius Warren Buffett or a shareholder of Berkshire Hathaway (NYSE: BRK-B), then by now you've certainly heard his investment management company started accumulating stakes in General Motors (NYSE: GM) and Viacom (Nasdaq: VIAB) last quarter.

And it makes sense.

One is an old-school auto manufacturer getting back on its feet, while the other owns some of TV viewers' favorite cable channels. Both businesses are easy to understand and both are based on relatively reliable business models. These qualities are right up Buffett's alley, even though one or both of the two new illustrious members of his investment team -- Todd Combs or Ted Weschler -- likely made the picks.

Yet, for investors looking to glean a stock pick, GM and Viacom may not be the best Berkshire coat-tails to ride -- they're just the highest-profile names being added to the $75 billion equity portfolio. Your best Buffett-based picks may actually be a trio of companies whose stakes he increased during the first quarter of the year.

Here's a closer look at them...

1. Bank of New York Mellon (NYSE: BK)
Even after beefing up his position in the regional bank by a whopping 213% during the first quarter, Bank of New York Mellon is still only a $118 million position, or 0.2% of Berkshire Hathaway's portfolio. It's also a bit of an oddity for Buffett, who tends to bet big when he bothers betting at all. And make no mistake -- if Buffett wanted more of the $24.5 billion bank, then he could certainly afford it.

What gives? Had he not added so much to the Bank of New York Mellon position, it would have been dismissed as another one of about 30 trades that barely even register as one of his holdings. Despite so many other matters on his plate at the time -- namely a now-failed co-bid to buy Avon (NYSE: AVP), prostate cancer and getting two new managers up to speed -- Buffett made a point of adding to this stake more than any other, in percentage terms.

Though it's still not clear why there's a sudden bigger interest in the regional bank, the fact that he's pouring so much more money into it now than he has before speaks volumes about his confidence in this stock.

2. DaVita (NYSE: DVA)
The $273 million Buffett used to add more shares of this kidney dialysis service provider to the Berkshire portfolio was actually his third-biggest purchase last quarter, second only to the money he added to a couple of his favorite standbys -- Wal-Mart (NYSE: WMT) and Wells Fargo (NYSE: WFC). The 13% increase in DaVita still only brings the total stake up to $ 493 million, or 0.7% of the total portfolio. But considering DaVita is only a fraction of the size of Wal-Mart or Wells Fargo, this is a pretty significant addition.

More than that, the addition beefs up Berkshire's exposure to the health care sector with a company that's far from being mainstream, even by health care standards. It's important to note that health care has never quite been Buffett's proverbial cup of tea in the first place.

Then again, Buffett may be onto something with DaVita. Although the reimbursement rules regarding medical procedures have been changing for a few years now, DaVita has been able to maintain a long string of annual earnings and profit growth. The forward price-to-earnings (P/E) ratio of 12, for instance, is attractive as is, but considering the company posts an occasional earnings beat, it still may not do the stock justice.

3. DirectTV (NYSE: DTV)
Finally, though the $124 million purchase of 2.65 million DirectTV shares only meant a 13% increase in the total stake, Berkshire's DirecTV holding has grown to a sizable $1.08 billion... a position that started as a small one, but has grown reliably since the third quarter of last year. In fact, this is exactly what's so noteworthy out about the position. Of the 30 or so fairly-meaningless trades Buffett made through Berkshire Hathaway, this is the only one that has slowly but steadily been becoming a significant one.

Buffett could buy the $30 billion cable provider outright if he really wanted. And if he really wanted to, then he would have done so by now. The alternative may be better for shareholders in the long run though, in that the accumulation "drip" keeps a firm floor in place for the stock price from one quarter to the next.

Buffett's attraction to DirecTV isn't hard to understand either. The company is a cash cow, with reliable top- and bottom-line growth. The projected P/E of nearly 9 likely appeals to Buffett's value senses too.

Risks to Consider: Just because they were in Buffett's favor last quarter doesn't mean they'll stay in his favor. Berkshire cut its Intel (Nasdaq: INTC) and Verisk (Nasdaq: VRSK) positions by about a third last quarter, for example, to investors' surprise. The profit-taking decision may have been prompted by solid run-ups from both stocks. Buffett is clearly not in a mood to continue buying them now, even though he was still buying them just one quarter earlier -- point being, things can change quickly.

Action to Take --> While General Motors and Viacom are high-profile names that grabbed all the headlines, it's not like Buffett is able to single-handedly bid them up. The smaller and off-the-radar stocks like the ones I named above are the ones he's shown repeated interest in accumulating, and are more apt to move upward, especially if he continues to buy them. Of the three in question, DirecTV may be the one to mirror first. It's proven to be just as reliable as a cash flow producer as either of the other two, but that reliability costs newcomers a lot less with DirecTV.

James Brumley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of BRK-B, INTC, in one or more of its “real money” portfolios.