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Warren Buffett's Stock Buffet

NEW YORK (TheStreet) -- If you were to assign human characteristics to the stock market -- reasonable since it is the sum of its participants' thinking -- it's an idiot savant. Unbelievably skilled at ferreting out (and punishing) greed and less than reasoned speculation, but then at times missing the writing on the wall.

When that happens, it takes an outsider to come in and show the market what it is missing. One such moment happened on Valentine's Day this year, when Warren Buffett announced he would acquire food company H.J. Heinz (HNZ) with 3G Capital for $72.50 a share.

Just before the deal was announced, HNZ was trading at $60.48, or about 17 times the April 2013 consensus earnings per share forecast of $3.55. Buffett's $72.50 bid valued the company at 20.4 times the forecast.

I don't know what Buffett's thesis is per se, but his valuation estimate is interesting and instructive. Specifically, since he doesn't chase companies that lose money and he only invests in companies that generate increasing amounts of cash over time, I think he's posited, and put his money where his posit is, that money can be made today and in the future by paying $20 for a dollar of earnings.

Buffett's speculation has been well digested in the market since there has been an across-the-board jump in the multiple for food companies, as the chart below demonstrates.

Since demand for food will never, ever go away, I recommend taking a look at the food companies listed above, and initially nibbling at them. I say nibbling because I feel food companies still offer good value today, but given the volatile, jumpy nature of our markets I feel additional entry points will present themselves.

Another by-product of dealing in the most necessary of all products is that food companies tend to throw off a lot of cash.

For instance, sticking with General Mills (GIS) for the moment, the company has been a stellar dividend payer and grower. Right now the yield is a healthy 3.1%.


More important, over the past 10 years GIS has grown its dividend from 55 cents per share to the current $1.55 share, for a very heady compound annual growth rate of 10.7%. Similarly, J.M. Smucker Company (SJM), yielding 2.1%, has also grown its dividend by 10.7% over the past 10 years, far outpacing inflation.

Below are the food companies we like, with the associated earnings date in case you want to tune in. Note Kimberly-Clark (KMB), which released earnings Friday showing higher profit and also raised its forecast.

  • General Mills (GIS), June 26
  • Procter & Gamble (PG), April 24
  • Kimberly-Clark (KMB), April 19
  • Kraft Foods (KRFT), May 2
  • Kellogg Company (K), May 2
  • Hershey (HSY), April 25
  • J.M. Smucker (SMJ), June 6
  • Dr Pepper Snapple Group (DPS), April 24
  • Green Mountain Coffee Roasters (GMCR), May 8
  • Dean Foods (DF), May 9

The GMG Defensive Beta Fund, which I co-manage, owns the following stocks on the list above: PG, K, KMB, GIS

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Oliver Pursche is President of Gary Goldberg Financial Services, a boutique money management firm located in Suffern, NY. Additionally, Mr. Pursche is the Co-Portfolio Manager for the GMG Defensive Beta Fund, and a Founding Partner of Montebello Partners, llc. In his role as President of GGFS, and as a member of the GGFS Investment Committee, Mr. Pursche helps oversee the investment portfolio of over 2000 clients with over $500 million dollars in assets. Mr. Pursche frequently provides market and economic commentary on CNBC and Fox Business News, as well as often being interviewed by The Financial Times, US News and World Report, Thomson Reuters, Bloomberg Businessweek, and the Associated Press regarding his and the firms views on the latest market news and events. Mr. Pursche's views on the market and investment strategies have been featured in the Wall Street Journal, Investors Business Daily, Smart Money, USA Today and other national business publications. In addition to writing for TheStreet.com, he is also a weekly contributor on Forbes.com and BankRate.com. His daily market commentary can be read at www.betafundcommentary.com or you can listen to him on www.financialtalkshow.com weekdays at 10:00 AM.

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