Investors as savvy as Warren Buffett don’t come around very often, and when he makes a move, people pay attention. Furthermore, when the market learns that Buffett has been buying or selling a stock that stock usually reacts depending upon Buffett’s move. But this by no means implies that he is infallible—just because Buffett is buying a stock, or just because he owns it doesn’t mean it is worth buying. In this article I point out three stocks that Buffett owns a lot of, but which I don’t believe are quality investments, at least at their current valuations.
First, however, I just want to remark that this doesn’t mean that investors shouldn’t follow Buffett at all. It’s just that rather than blindly following his actions the best approach is to look at what he is doing to get ideas. So, for instance, if he is buying Exxon Mobil (NYSE:XOM), he probably has a good reason for doing so, and as an investor, I recognize this and can incorporate it into my analysis of the stock. If I see what he does, then I will follow him in. But in the case of the three stocks I discuss in a moment, I don’t see any reason for owning them. While he has held a couple of them for many years, and while he has made money with them I think that they are ultimately poor investments at current valuations.
1. Proctor and Gamble (NYSE:PG)
Proctor and Gamble has done an excellent job of creating long-term shareholder value. Unfortunately there are a couple problems with the company right now. The first is that it has not been growing its earnings in the past few years. In fact 2013 earnings are down from 2010. Meanwhile the company is trading near an all-time high at 22 times earnings. While I don’t think the stock is going to crash, I think investors are starved for yield, and they are turning to stocks such as Proctor and Gamble for dividends and perceived safety. But if the market corrects and stocks such as Proctor and Gamble trade at lower price to earnings multiples (remember that 14 times earnings is historically “normal”) then the shares have significant downside risk.