Buying What Buffett Sells? Sometimes it Works
With 13F filing season right around the corner, investors will once again be treated to a bevy of data regarding which stocks some of Wall Street's most famous names were buying and selling in the fourth quarter. This is also a time to remember the dichotomy presented by 13F filings.
Sure, it is useful to know that investing luminaries such as Bill Ackman, Warren Buffett and Carl Icahn initiated new positions and sold out of others in the prior quarter. Conversely, investors must remember that the copycat approach does not always work because there is a good chance the retail crowd will not be getting the same prices that the pros got. Frankly, there is a good chance retail investors opting to use 13F filings as a guide to finding winning stocks will pay more than pros did for the same names.
There is something else to note about 13F filings. That being the pros are not perfect. No one has a perfect batting average on Wall Street, not even the venerable Buffett, perhaps the greatest value investor of all-time. All of that is to say that just because a famed investor has parted ways with XYZ Corp. that does not mean shares of XYZ are not worth a look.
Believe it or not, some of the stocks Buffett's Berkshire Hathaway dumped or trimmed positions in during the third quarter of 2012 have taken off nicely since then. Some are still worth looking at, particularly for patient, dividend investors with longer-term time horizons. In no particular order:
Procter & Gamble (NYSE: PG) Berkshire trimmed its massive stake in the world's largest consumer products in the third quarter and Buffett said as recently as late October 2012 that his company had sold some P&G shares due to valuation.
Berkshire is still one of the largest P&G shareholders having held 52.7 million shares at the end of the third quarter, so it would not be accurate to say Buffett is bearish on the stock. However, newcomers to the stock have been rewarded as shares of P&G have surged almost 10 percent since early November.
What is interesting about P&G is not so much that investors could have done well by going the opposite way of Buffett. Rather, had investors played copycat to another noteworthy professional they would be sitting on impressive gains. Ackman's Pershing Square Capital Management boosted its P&G stake to 34.4 million shares during the third quarter.
Pershing Square's stake in P&G was revealed in July 2012 and for all the controversy Ackman finds himself in the middle of with Herbalife (NYSE: HLF), folks seemed to have forgotten that P&G has soared 19.5 percent since August. So even waiting a couple of weeks to follow Ackman into P&G was not a bad idea.
Johnson & Johnson (NYSE: JNJ) It is not surprising that Berkshire trimmed its stake in J&J. Going back to 2011, Buffett was not a fan of the company acquiring Swiss medical-device maker Synthes for most shares. Acquisitions paid for in shares dilute current shareholders and J&J paid for Synthes with two-thirds stock and one-third cash.
Buffett did not idly criticize J&J. He put his money where his mouth is by reducing Berkshire's stake in the Dow component by 95 percent during the third quarter. Translation: A few years ago, J&J was one of Berkshire's largest equity holdings. Today, J&J is one of Berkshire's smallest stock holdings.
In mid-December, we predicted J&J would be one of the Dow's 2013 rebound candidates. That assessment has proven accurate as the shares are up 4.7 percent year-to-date.
An investor that bought the stock in say November 2012 upon learning Berkshire dumped most of its stake has earned 6.2 percent. Again, Berkshire selling most of its J&J stake does not mean J&J is a bad company. An AAA credit rating, $2.9 billion in cash and a five-decade dividend increase streak say otherwise.
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