Buffett’s Golden Rule: 10 Stocks Trading for Less Than 10% Above Book Value

Warren Buffett stocksAre you an investor looking for the Holy Grail? Today is your lucky day. The guru of all gurus, Warren Buffett, just divulged the single most important secret for buying stock: Don’t pay more than 10% above book value for any stock.

Millions follow Buffett looking for clues as to his investment strategy. They come from miles around to hear him speak at the Berkshire Hathaway (NYSE:BRK.A, BRK.B) annual meeting. They hang on his every word perusing SEC filings for any insights on what it is that Buffett is buying.

Monday morning’s announcement that Berkshire Hathaway would buy back its stock is the last piece of information you will ever need to see from Buffett. In the statement is this quote: “no higher than a 10% premium over the then-current book value of the shares.”

And there it is in all its simplicity. The one simple thing investors need to do for investment success is to buy stock at a price no greater than 10% above book value. Follow that simple plan, and you too can be on your way to Buffett-like investing success. Forget about all of the daily worries and gyrations of the stock market. Stay disciplined with your buying, and over time you will make money. It is what Buffett has been doing since he started buying stock and continues to this day with his company’s own repurchase of shares.

With that in mind, here are 10 stocks trading for less than 10% above book value:

Hartford

It is no secret that Buffett likes insurance businesses. Indeed, they are wonderful companies to own from an investing standpoint. Take in more premiums than you pay out to policyholders, and you win. The best part is you get to reinvest those premiums in other investments. Be smart and disciplined like Buffett and take a look at Hartford (NYSE:HIG). The large property and casualty stock trades for 0.34 times book value — way below the 10% threshold. Hartford also pays a dividend of 2.5%. Shares are down nearly 50% since the spring, yet operating performance is strong. The company has beaten Wall Street estimates in three of the past four quarters, missing last quarter — but by only a penny per share.

KKR Financial

KKR Financial (NYSE:KFN) is in the business of making corporate loans to private equity borrowers. Formed in 2004, the company was severely hurt by the near-collapse of the financial markets in 2008. Shares bottomed in 2009 near $1 per share but have since recovered nicely. The company has had no trouble raising capital for its primary business, announcing recently that it had raised $1 billion to provide mezzanine financing to fund buyouts. The recent selloff in shares increased KKR’s dividend yield to more than 9%. Shares trade for 0.76 times book value.

KB Home

Talk about a distressed industry. Homebuilders have yet to recover from the housing market collapse. Excess supply and lack of demand has greatly damaged the industry. That said, homebuilders have shed unwanted land from balance sheets and are poised to rally once demand recovers. KB Home (NYSE:KBH) recently reported earnings that, while still a loss, were better than expected. And shares still are cheap. The company trades for just more than one times book value. Many have tried calling the bottom, but if you’re using book value as your guide, you don’t need to time the market. Historically, owning homebuilders at book value or less has yielded superior returns over the long haul.

Brasil Telecom

Telecom companies are great businesses to own, as they tend to deliver strong cash flow regardless of economic conditions. Brazilian telecom company Brasil Telecom (NYSE:BTM) is an emerging-market company that yields high dividends. Its shares trade for 0.64 times book value. At current prices, the dividend yield is 3%. Shares are down more than 40% since the beginning of June. Now would seem to be a good time to buy.

NRG Energy

NRG (NYSE:NRG) is a major player in the power generation business. Although the company does not pay a dividend, shares trade for just 0.64 times book value. Since mid-July, shares of NRG have lost about 13% of their value. The discount in share price is directly related to recent operating performance. Quarterly profits have been mixed during the past four quarters, with the company missing estimates in two of those periods. However, in the last quarter ending June 30, the company greatly exceeded expectations. Take advantage of the low price and the variability in earnings. As the economy settles down, power generation is likely to return to a less volatile state.

Walter Investment Management

Walter Investment Management (AMEX:WAC) is a real estate investment trust that buys and sells mortgage securities. It is no secret the troubles the mortgage industry has faced since the housing market collapsed. Walter fell off the cliff in 2008 and bottomed in 2009. Shares have recovered nicely, but the mortgage business still struggles from the weight of non-performing assets. Today, Walter trades for 1.1 times book value — right at the Buffett threshold. The company pays a monster dividend of 8.8%, deflecting questions regarding Walter’s balance sheet. Assuming assets are appropriately valued, Walter is an extremely cheap stock.

Molson Coors Brewing

I don’t know why, but I picture Buffett as a beer drinker. I can see him hoisting a few brews, playing an accordion and dancing the polka. Imagery aside, if he is a beer drinker, perhaps we might see Berkshire Hathaway getting involved in a stock like Molson Coors Brewing (NYSE:TAP). Shares trade for 0.9 times book value, and the company pays a 3.3% dividend. Since peaking above $50 per share at the end of last year, the company has been drifting lower in 2011. With the stock down some 22% in 2011, now would seem to be a good time to acquire shares.

Boston Scientific

Buffett must be having a hard time deciding what to do with his money, considering there are so many great companies trading for less than 10% above book value. Another such stock is Boston Scientific (NYSE:BSX). The medical device maker trades for 0.76 times book value. No doubt the company has been struggling. The company has been on a downward trajectory during the past five years, but it has a long history of developing medical devices that sell. The idea of buying below book value is that you are own a stock for the long term with minimal downside risk. With shares trading near historical lows, it would seem like a no-brainer to own Boston Scientific.

The Washington Post

Another business utterly decimated in recent years is The Washington Post Co. (NYSE:WPO). The media company has struggled with the decline of print and readers’ flight to the Internet. Subscription and advertising revenues are way down, and shares trade for about a third of where they were before the recession began in 2008. At current prices, The Washington Post trades for 0.95 times book value and pays a dividend of 3%. Media might not be attractive today, but the company still delivers reliable cash flow. This is exactly the kind of company Buffett would buy today.

BlackRock

The asset management business is a wonderful cash flow generator. Unfortunately, bear markets can be outright destructive; fortunately, bear markets do not last forever. The natural path for stocks is higher. As such, owning a money management business like BlackRock (NYSE:BLK) at prices below 10% above book value can be profitable. BlackRock is a $27 billion market-cap company. It will survive whatever economic calamity comes its way, and when times improve, Blackrock is poised to make a bundle. While investors wait, the company pays a solid dividend of 3.8%.


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