Time for a Rally? Warren Buffett Builds Up Stock Positions

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Investing magnate and Berkshire Hathaway CEO Warren Buffett used his cash reserves in a big way over the third quarter, investing $23.9 billion, the biggest move for his company in at least 15 years. Could this signal an oversold market?

According to a report from Bloomberg, the "Oracle of Omaha" bought almost $7 billion of stocks over a quarter that saw some gigantic headwinds to the market, including Standard & Poor's U.S. credit downgrade and a frightening evolution of Europe's debt crisis. Stocks had their worst quarterly performance since 2008.

Buffett's targets
Berkshire's investments were filed on November 4; among the big moves were "$6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America and the acquisition of Lubrizol for about $9 billion," according to Bloomberg. Berkshire also disclosed new stakes in MasterCard (MA) and retailer Dollar General (DG), although Berkshire has not yet disclosed its full third-quarter stocks statement.

"We're ready to buy lots of things," Buffett told Bloomberg Television's Betty Liu on Sept. 30. "If the stock is cheap, we will buy it."

"Historically he has preferred consumer products and banking to industrial companies," said James Armstrong, president of Berkshire shareholder Henry H. Armstrong Associates. "But the market changes, so the names he comes up with changes."

Berkshire's holdings of stocks labeled "commercial, industrial and other" rose 62% over the third quarter to $17.4 billion, surpassing holdings in both financial and consumer-product firms.

Is Buffett's wide net for stocks suggesting an oversold market?

Investing ideas
For ideas on potentially oversold and undervalued names, we ran a screen on S&P 500 dividend stocks undervalued by the Graham number.

The Graham number was actually developed by Buffett's former mentor Benjamin Graham as a proxy for a stock's maximum fair value. Stocks trading at a significant discount to their Graham number may be undervalued.

The Graham Number = Square Root of (22.5) x (TTM Earnings per Share) x (MRQ Book Value per Share). This equation assumes that a stock is overvalued if P/E is over 15 or P/BV is over 1.5.

Do you think these stocks are at good prices to buy in?

List sorted by potential upside implied by Graham number. (Click here to access free, interactive tools to analyze these ideas.)

1. NYSE Euronext (NYS: NYX) : Operates securities exchanges. Market cap of $7.22B. Dividend yield at 4.35%, payout ratio at 48.77%. TTM Diluted EPS at $2.17, MRQ Book Value Per Share at $27.32, Graham number at $36.52 (vs. current price at $26.63, implies a potential upside of 37.15%).

2. ConocoPhillips (NYS: COP) : Operates as an integrated energy company worldwide. Market cap of $96.58B. Dividend yield at 3.63%, payout ratio at 32.21%. TTM Diluted EPS at $7.80, MRQ Book Value Per Share at $51.03, Graham number at $94.63 (vs. current price at $71.58, implies a potential upside of 32.21%).

3. Best Buy (NYS: BBY) : Operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. Market cap of $9.72B. Dividend yield at 2.38%, payout ratio at 19.73%. TTM Diluted EPS at $2.99, MRQ Book Value Per Share at $16.65, Graham number at $33.47 (vs. current price at $26.46, implies a potential upside of 26.49%).

4. Sealed Air (NYS: SEE) : Manufactures and sells packaging and performance-based materials and equipment systems worldwide. Market cap of $2.91B. Dividend yield at 2.85%, payout ratio at 33.84%. TTM Diluted EPS at $1.40, MRQ Book Value Per Share at $15.93, Graham number at $22.40 (vs. current price at $17.82, implies a potential upside of 25.71%).

5. BB&T (NYS: BBT) : Operates as the financial holding company for Branch Banking and Trust Company that provides banking and trust services to small and mid-size businesses, public agencies, local governments, and individuals in the United States. Market cap of $16.86B. Dividend yield at 2.65%, payout ratio at 39.66%. TTM Diluted EPS at $1.56, MRQ Book Value Per Share at $25.07, Graham number at $29.66 (vs. current price at $23.61, implies a potential upside of 25.64%).

6. Raytheon (NYS: RTN) : Provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally. Market cap of $15.83B. Dividend yield at 3.76%, payout ratio at 33.30%. TTM Diluted EPS at $4.89, MRQ Book Value Per Share at $29.65, Graham number at $57.12 (vs. current price at $45.47, implies a potential upside of 25.61%).

7. The Travelers (NYS: TRV) : Provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. Market cap of $24.37B. Dividend yield at 2.78%, payout ratio at 39.36%. TTM Diluted EPS at $3.91, MRQ Book Value Per Share at $60.98, Graham number at $73.24 (vs. current price at $58.62, implies a potential upside of 24.95%).

8. Invesco (NYS: IVZ) : Provides its services to individuals, typically high net worth individuals. Market cap of $9.15B. Dividend yield at 2.42%, payout ratio at 30.83%. TTM Diluted EPS at $1.51, MRQ Book Value Per Share at $18.16, Graham number at $24.84 (vs. current price at $19.96, implies a potential upside of 24.44%).

9. Carnival (NYS: CCL) : Operates as a cruise and vacation company. Market cap of $26.74B. Dividend yield at 2.91%, payout ratio at 34.51%. TTM Diluted EPS at $2.45, MRQ Book Value Per Share at $31.65, Graham number at $41.77 (vs. current price at $33.95, implies a potential upside of 23.03%).

10. Chevron (NYS: CVX) : Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $216.79B. Dividend yield at 2.98%, payout ratio at 22.20%. TTM Diluted EPS at $13.50, MRQ Book Value Per Share at $57.74, Graham number at $132.43 (vs. current price at $107.72, implies a potential upside of 22.94%).

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Alexander Crawford does not own any of the shares mentioned above. Data from November 7. BVPS, EPS, and price data sourced from Yahoo! Finance.

At the time this article was published The Motley Fool owns shares of Mastercard, Raytheon, Best Buy, and Bank of America. Motley Fool newsletter services have recommended buying shares of Chevron and NYSE Euronext. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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