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Billionaire financier and Berkshire Hathaway CEO Warren Buffett eats ice cream during the annual Berkshire shareholders meeting in Omaha, Neb., May 3, 2008. (Carlos Barria/REUTERS)
Billionaire financier and Berkshire Hathaway CEO Warren Buffett eats ice cream during the annual Berkshire shareholders meeting in Omaha, Neb., May 3, 2008. (Carlos Barria/REUTERS)

STRATEGY

Buffett finds value in his own firm Add to ...

John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds. Globe Investor has a distribution agreement with Validea, a premium Canadian stock screen service. Try it.

With his Berkshire Hathaway Inc. sitting on billions of dollars in cash, Warren Buffett has been quite vocal about his desire to find places to put money to work. In early December, Mr. Buffett did just that, with Berkshire making a $1.2-billion (U.S.) investment in a large, well known firm with a lengthy track record of success.

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Which company caught the eye of the Oracle of Omaha? Was it Exxon Mobil? Coca Cola? Microsoft?

Nope. The company in question was none other than Berkshire itself. The firm snatched up 9,200 of its own shares, reportedly from the estate of a major shareholder.

Mr. Buffett seeks out value wherever he can find it, and if that happens to be in his own company, then so be it. In 2011, Berkshire authorized a share repurchase program that would allow the company to buy back its own shares if they were selling at no more than a 10-per- cent premium to the firm’s per-share book value; it raised that premium to 20 per cent when it made its recent buy-back.

When a company repurchases its shares and retires them, it can be a nice boost for its investors. Since a share of stock is essentially a claim on the future earnings of a company, fewer shares outstanding means each remaining share gets a bigger chunk of those future earnings. And, over the long run, earnings drive stock prices.

This year, companies have been buying back their own shares at a rapid pace. Through the third quarter, U.S. firms’ share repurchases outpaced new share issuance by $274-billion, The Wall Street Journal recently reported. A number of major Canadian firms are also in the midst of big buybacks.

But share buybacks shouldn’t be made willy-nilly. That’s why Berkshire has rules in place that ensure it will only buy back its own shares when the price is right, and when the company still has a big cash cushion remaining after the purchases.

“The first law of capital allocation … is that what is smart at one price is dumb at another,” Mr. Buffett wrote in discussing share buybacks in his 2011 annual letter. In other words, companies that buy back bloated, overvalued shares are probably better off putting their cash to use in some other way.

My Guru Strategies, which are based on the published approaches of Mr. Buffett and other investment greats, are high on a number of firms that have been buying back their own shares.

These strategies target companies with strong financial positions and attractively priced shares – the kind of firms that are doing their shareholders a favour by repurchasing stock.

Here are a few firms that have shown a willingness to buy back their shares, and which get high marks from my Buffett-based model. As always, you should consider stocks like these within a well diversified portfolio.

Petrominerales Ltd.

(PMG.TO)

Based in Calgary, Petrominerales is an oil and gas firm with exploration and production activities in Peru, Colombia and Brazil. The firm bought back about 15 per cent of its outstanding shares in the first three quarters of 2012 and it’s a favourite of my Joseph Piotroski-based model, which looks for unloved stocks with strong fundamentals.

For a full Validea.ca report on PMG click here.

MacDonald Dettwiler and Associates Ltd.

(MDA.TO)

British Columbia-based MDA is involved in the surveillance, communication and advanced technology markets. It has shown a willingness to buy back its shares and gets strong interest from my Peter Lynch-based model. To find undervalued growth stocks, Mr. Lynch liked to calculate a company’s PEG ratio – its price-to-earnings (PE) ratio divided by its growth rate. MDA’s 0.89 PEG ratio comes in under the model’s 1.0 upper limit.

For a full Validea.ca report on MDA click here.

Rogers Communications Inc.

(RCI.B-TO)

This Toronto-based media power is in the middle of a one-year program in which it can repurchase as many as $1-billion worth of its shares. It gets strong interest from my James O’Shaughnessy-based model, which looks for large firms with strong cash flows and high dividend yields. Rogers is plenty big enough, has $8.65 (Cdn.) in cash flow per share (more than six times the market mean), and has a solid 3.5-per-cent yield.
 

For a full Validea.ca report on RCI.B click here.

 
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