Three Buffett Bargains I Just Bought

Dear Rich Lifer,

Over the last couple of weeks, I’ve been breaking with tradition and discussing some of the real-life trades that I’ve been doing in my own IRA account.

The reason is simple: Pretty much everyone I know is asking me what to make of the current market along with what I recommend doing.

I figure the best way to answer is by SHOWING everyone right here.

In past columns, I told you why I bought into the SLV silver ETF and then sold covered calls against my position after it rallied substantially …

I also told you I had done the same thing with Philip Morris International …

And that I had quickly traded both BP and Royal Dutch for quick gains in excess of 30%.

Just based on all of that information, you can surmise that I am not convinced we’ve seen a long-term bottom in U.S. stocks. 

Indeed, I explained why current market valuations remain elevated by historical standards despite all the uncertainties related to the ongoing COVID pandemic.

The way I see it, the best way to play this market is buying high-quality, defensive, income-producing shares that would be fine to own for the long-term … while also aiming to take plenty off selling them if the short-term profits pile up quickly.

If I can make 30% or 40% in a matter of weeks – from some of the most boring businesses on the planet – I’m taking my money back off the table.

I actually did just that with two additional names and will consider making it a trifecta very shortly… 

Buying Like Buffett

What’s funny is that all of these names have all been Warren Buffett targets over the last few years. 

Take Kraft Heinz (KHC).

The company was struggling long before the novel coronavirus reared its ugly head.

For one thing, younger consumers simply haven’t been buying the same old packaged foods as their parents and grandparents. Kraft Heinz has been slow to adapt its product lines to reflect that change.

Recent reports suggest items like boxed mac n’ cheese have been in high demand during the quarantine and I think we’ll see good short-term results because of that. Still, new CEO Miguel Patricio will have to help KHC embrace new trends if the company is going to have a chance of increasing its sales and earnings in any meaningful way.

In the meantime, there is some concern that KHC might not be able to support its current dividends. Last year, those payments were more than the company’s per-share earnings.  

Would I bet that Kraft can pull itself out of this slump? Yes … especially at the right price.

35% Profits In Just 3 Weeks

Which is why I bought in on March 23rd at $21.05.

Based on his latest filing for Berkshire, Buffett currently owns more than 325 million shares of KHC (roughly 26% of the company) at an average price of 28.05!

Of course, after I bought in, the shares rallied sharply all the way back to Buffett’s effective entry price.

So I sold back out at 28.39 on April 14th.

Total profit? 34.8% in three weeks.

Why not hang on for a lot more upside?

It wouldn’t be wrong to do so.

But given the overall environment and Kraft’s specific challenges, I’d be crazy to let that type of quick gain evaporate.

Far better to move back to the sidelines and see what happens. If Kraft falls, I’ll consider re-entering and be able to buy more shares for the same dollar amount. If it rises further, I’ll simply re-evaluate.

Another 32% In Just 3 Weeks

Same deal with International Business Machines (IBM).

The company needs no introduction, and it was another Buffett darling for much of the last decade.

Too bad things didn’t work out and he ended up selling the last bit of his substantial position in 2018.

Me? I still think the company has a ton of value, especially given substantial opportunities in cloud computing … artificial intelligence … and blockchain. (IBM also happens to be the first stock I ever bought for my own account back when I was in sixth grade, but that’s a story for another time.)

When I saw the shares dip below $100, I couldn’t help buying some. Specifically, I entered the same day I bought KHC — March 23rd — at 94.25 per share.

As of April 14th, the day I was exiting Kraft, IBM had rallied pretty nicely as well. So I sold my shares at $124.14.

The gain on that trade was a very respectable 31.7%.

Heck, if you’re making more than 10% a week … when the market usually goes up 10% a year on average … then it’s pretty hard to complain. And it would be pretty dumb to let all that profit go up in smoke if, as I suspect, the broad indexes are going to give back some of the gains they’ve recently tacked on.

Conservative Investors SHOULD Trade During Crisis

That brings me to a third position that I bought on March 20th, just a few days before KHC and IBM – Wells Fargo (WFC).

Like the other companies, Wells was already reeling before COVID – especially because of several headline-grabbing scandals like the infamous “fake account” scandal.

For his part, Buffett remains a believer and Berkshire owns more than 323 million shares (7.9% of the company) at an average price of $28.44.

I bought in at $26.73.

Beyond the fact that I got my shares cheaper than Buffett, there’s the simple idea that Wells Fargo remains a major financial institution that is very profitable.

Will results be impacted by the current crisis? Of course. Everything from small business loans to residential mortgages are almost certainly going to see rising defaults.

Even first-quarter earnings, which the company reported on Tuesday, already started to show what could be coming.

Wells reported just one penny per share in profits because it put aside $3.1 billion for future loan losses. Its investment portfolio lost $950 million. Revenue fell double-digits across its three business units. And CFO John Shrewsberry told analysts the bank is expecting flat economic growth in the U.S. through 2021.

But like its other “too big to fail” banking brethren, it continues to have strong implied support from the U.S. government.

After two days of weakness in the shares, I’m still up a bit and happy to hold for years if necessary.

At the same time, I will also look to grab profits on any possible rally or consider covered call selling as a way to split the difference.

So my overarching message is that there are plenty of quick gains to be made in this type of volatile market, and there’s no need to go after high-risk plays when even blue chip stocks are swinging 30% and 40% in a matter of weeks.

That said, don’t feel bad simply sitting it out. I continue to believe the odds favor a chance to buy nearly any company you want at a cheaper price someday in the future.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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