Draft Picks for Your Value Portfolio

 | May 01, 2013 | 1:30 PM EDT  | Comments
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Stock quotes in this article:

wm

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hbi

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brk.a

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ko

I have a confession to make. I am die-hard Arizona Cardinals football fan and have been since they moved to my native Phoenix in 1988. To be a Cardinals fan is to know suffering and constant disappointment. Although not as romanticized as the ill-fated Chicago Cubs, the Cardinals have been a dismal team throughout most of their long history. In the last 25 years, they have missed the playoffs over 80% of the time. Even their magical Super Bowl run a half-decade ago resulted in a heartbreaking last-minute loss.

One of the core causes of the Cardinals' long-term travails is the team's momentum-trading-like behavior. The Cards are infamous for trading away picks for the latest hot backup quarterback (Kevin Kolb), or drafting personnel who put up great "combine metrics" but never produced much in college. The results have been predictably disastrous. However, this has started to change over the last couple of years. The downtrodden Cards are starting to channel their inner Warren Buffett during the draft process.

The recently completed draft shows this change in style in spades. In the first round, the team drafted one of the best offensive guards to come out of college in years. It was not a sexy pick, and it was a couple of selections higher than where the player was projected to go. However, paying a slight premium for a guy who is going to be a mainstay on your offensive line for the next 10 to 12 years is something the Oracle of Omaha would be proud of.

In the next three rounds, the Cards shored up depth on both sides of the ball and picked up a lot of value by drafting personnel that fit their needs. All of these draft selections were value picks, as these players had dropped significantly lower in the draft than expected. In the first four rounds, the team drafted nary a quarterback, wide receiver or running back. It waited until the fifth, sixth and seventh rounds to add more value picks in these high-profile areas.

As a result of becoming value investors, the Cardinals added two or three day-one starters, added depth and might have picked up some hidden gems as well. Sounds a lot like Berkshire Hathaway's (BRK.A) portfolio. For the first time in a decade, the pundits loved the Cardinals' draft. The team was awarded "Best Draft in the NFL" status by one of four experts on Sportcenter. (Of course, being the Cards, two of the three other "Best" categories went to teams within their division.)

I could easily see Warren Buffett running a draft room, given his keen eye for talent and his willingness to pay a slight premium to pick up a needed player that will be a stalwart for a decade (such as Burlington Northern) and his ability to uncover hidden value. Here are two "draft" picks I could easily see the renowned investor coveting.

Hanesbrands (HBI): This manufacturer of undergarments fits right in with some of the other investments in Berkshire Hathaway's portfolio (such as Coca-Cola (KO)). Hanesbrands is the best-run company in a slow-growing, mundane category. Its iconic brands include Hanes, Champion and Leggs. It even has Michael Jordan as a spokesman. Even with 2% to 3% revenue growth, the company consistently grows earnings in the high single digits. Hanesbrands trades at just over 12x 2014's projected earnings, yields 1.6% and sells at 8x cash flow.

Waste Management (WM): I am actually surprised that Buffett has never made a play on a major waste management company. It is another mundane business that provides a wide moat, as it is very difficult to acquire the right land and get the permits to establish a new landfill. Since the industry is controlled by a few major players, pricing power is very solid and predictable. Waste Management is a good value stock whose business should continue to improve as the economy picks up. The stock pays a generous 3.6% yield, and the shares go for around 8x cash flow.

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