What do we make of the Big Four, the four companies that are the mainstays of Warren Buffett's investment portfolio: American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC)?
First, just as we can't judge a book by its cover, we can't judge this man by his Big Four. It's the regular businesses and their tremendous cash flow that have long eclipsed the power of the Big Four or any of Buffett's stock holdings, which is another reason why I have been adamant that it is not worth following the master in his stock picks, just his company's shares.
Why not? You want them all. You want his investments alongside 3G Capital. You want his preferred position in Bank of America (BAC). You want his wind tax credits and his mass of pipelines with their gigantic cash flow, not to mention an insurance business that, while chided by Buffett as too competitive, at least when it comes to the reinsurance side, still makes up the secret sauce of the so much of Berkshire Hathaway (BRK.A). Of course, you want Burlington Northern, but not as much as you would have at one time, as the rail is a huge transporter of oil. All I can say is better than coal!
So let's deal head on with the Big Four because they are at tricky stages in their existence. First, American Express, I think, has lost its edge. While the brand remains strong, the numbers just don't support the kind of growth that portfolio managers want. It has nowhere near the growth rate of MasterCard (MA) or Visa (V) or the soon-to-be-spun-off PayPal, but it is very cheap, at 14x earnings, vs. its historic growth. Here's the issue, though. The company has become poorly run, relying on cost cuts and partnerships that are faltering. Witness the Costco (COST) debacle, a company that went hand-in-hand for more than 5 cents a share that we didn't even know about until the deal was lost. That's unfathomable.
The recent meeting proved nothing other than that American Express has been left behind by the Web. Where is this company when it comes to the things that Expedia (EXPE) brings to the party? Why didn't it buy Priceline (PCLN) or TripAdvisor (TRIP)? It was a stake holder in the incredibly valuable Concur (CNQR), and it sold its stake when SAP (SAP) bought the company. The bet? New management comes in and catches up. Not a bad bet, but one based solely on hope.
To me, Coca-Cola is intriguing because of the calls it has on the super-growth vehicle that is Monster (MSNT) and the potential home run that another company it has a stake in, Keurig Green Mountain (GMCR), might hit with its cold-drink process. Plus there's the nice 3% yield and the possibility of a peak in the dollar vs. emerging-market currencies as Coca-Cola is hedged vs. the euro and the yen. I do worry that, like American Express, Coca-Cola is an old brand, this time with health consequences attached to it, but if you share Buffett's affinity toward fattening drinks, be my guest.
IBM's a work in progress. It's turning, but I don't know how fast it can turn. It needs to go from being a hardware business with a software and consulting edge to a company that mines data and melds social, mobile, cloud and cognitive thinking or artificial intelligence. Thirty percent of the company's good, 70% I can do without. But if it tips, there's a big win, especially if you think the dollar's peaked and this company has reinvented itself so many times, who am I to disagree with the Oracle.
Ah, best for last. Wells Fargo is a coiled spring, one rate hike away from $65, 10 points in a heartbeat, as it can make fortunes on its deposits. In the meantime, it keeps paying that large dividend, but it needs to be far more aggressive in its share buyback to truly get anywhere near where it issued so much stock to deal with the Great Recession.
Still, to me it's the least "tired" of the Big Four, the most inventive, and the one with the best growth. But let's be honest, if you had to start over with these same sectors, you'd go MasterCard or Visa; Pepsico (PEP), not Coca-Cola; Apple (AAPL), not IBM, and you'd keep the best bank in the world, Wells Fargo.
