blue-chips

All posts tagged blue-chips

About four months ago I made the case for going long Cisco. At the time, Google shares (GOOG) had popped 20%, and I was looking for a new company to invest in.

In the middle of July Cisco (CSCO) was trading at $15.66.  From a fundamental perspective, Cisco was cheap – selling at less than 10 times free cash flow, and had just started paying a 1.5% dividend. However, the market was discounting the stock price  because they didn’t believe the CEO, John Chambers, could revitalize the aging tech giant.

But regardless of the management, based on just the numbers, the stock was too cheap too pass up.

And numbers don’t lie.

Yesterday, Cisco announced stellar results. It seems that growth is picking up.

Since that last post, shares of Cisco are up almost 20%, at $18.61.

Cisco isn’t the only company doing well this economic environment.

Large cap blue-chip companies like Intel (INTC), Microsoft (MSFT), Walmart (WMT), Johnson &  Johnson (JNJ) are also doing well.  Even my old favorite Vodafone (VOD) which I bought over a year ago is doing well. The share price, currently at $28.39, is up nearly 23% from my purchase, and it currently yields 6.75%.

So what stock is worth buying today?

Believe it or not, it’s Warren Buffet’s Berkshire Hathaway (BRK-A or BRK-B).

Buffett recently announced that Berkshire would buy back shares below 1.1 times the book value. The world’s best value investor definitely recognizes value in his company stock price and has effectively put a floor underneath the stock.

Currently trading at a Price/Book  of 1.15,  the stock is close to that floor.

Let’s look at the B shares, or the baby Berkshires (BRK-B), which currently trade at $76.

Buffett’s 1.1x of book value puts the stock price floor at $72.69. But how much is the stock actually worth?

This is actually very simple to calculate.

The value of the publicly-traded securities owned by Berkshire is $63.66. The rest of the companies made $4.8 in earnings. These companies are worth about 10 times the earnings or another $48.

Add the $48 to the $63.66 and we get $111.66.

So buying Berkshire today means we have a floor at 5% below today’s price, and an upside of 31%.

Disclosure: I’m Long CSCO, BRK-B, MSFT, INTC, WMT and JNJ