Uncovering Buffett's Top Two Gems

 | Sep 20, 2013 | 12:00 PM EDT
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According to Warren Buffett's 13F filings with the Securities and Exchange Commission (SEC) for Berkshire Hathaway (BRK.ABRK.B), his equity portfolio typically ranges between 30 and 40 positions each quarter. While it's widely known that he loves Coca-Cola (KO) stock and his big bank of preference is Wells Fargo (WFC), these surprisingly aren't his best picks -- according to one measure.

Tom Gayner and Wallace Weitz are two multi-billion dollar investors who have been imitating Buffett for a long time; they think they're buying Buffett's most promising picks. So, using this logic, we'll parse down the Oracle's equity portfolio by cross referencing his holdings with those that that both Gayner and Weitz hold as well. Seventeen of Gayner's stock picks match Buffett's picks and five of Weitz's picks are identical to Buffett's.

This exercise gave us two stocks: Liberty Media (LMCA) and United Parcel Service (UPS). The former has been in Buffett's equity portfolio since the last quarter of 2011. Although he briefly closed his position in the first quarter of this year, his second-quarter 13F filing indicates that Liberty Media now makes up a $700 million-plus position. UPS, on the other hand, is a very long-term position for Buffett, and has been a member of his equity portfolio since we began tracking him at the end of 2010.

But why are Gayner and Weitz both so independently bullish on these two Buffett holdings? For one, the capital appreciation has been there of late, that's for sure. Since its spinoff of Starz (STRZA) in early January, shares of Liberty Media have risen 36.1%. UPS is up  just below 20%, year-to-date.

Generally speaking, the perception is that UPS holds more international exposure in the freight and logistics industry, while rival FedEx (FDX) offers investors a bit more concentration. UPS's expansion plans in China are promising, specifically in its healthcare logistics segment. The company has added four distribution sites to its operational footprint in the country over the past two years, in Chengdu, Shanghai and Hangzhou, with the goal of "serving China's emerging middle class," according to a statement.

Trading at 16x forward earnings, the shares of the shipper aren't exactly cheap but Buffett, Gayner and Weitz are likely in the name for its combination of dividends and international growth. In part due to its strategy for China, Wall Street expects UPS to grow its bottom line by 15% next year, a full 4 percentage points above its post-recessionary average. This is the second-highest mark in its industry (of S&P 500-listed stocks), and its dividend yield of 2.7% places it at No. 1.

Liberty Media, on the other hand, offers much more of a growth-at-a-reasonable-price play. Shares of the media and entertainment company have been undervalued since shedding Starz from its books. And, investors who got in during the brief Liberty Spinco period (or soon after) have seen quite a return. Much like our previous analyses of post-spinoff success, the larger entity sees value appreciation in the following six to 12 months following a split.

At current levels, Liberty Media shares are still ridiculously cheap at a price-to-earnings growth (PEG) of 0.42. An average valuation for a stock of Liberty's size is around 1.5, and anything below 1.0 is considered cheap. With an average price target of $161 from the sell side and shares currently trading near the $148 mark, it's clear that the smartest guys in the room agree with Buffett and his mega-investor friends.

While some may think they know what Warren Buffett's top picks are, these two companies are the best of the bunch -- at least according to two very wealthy mimickers.

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