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The week’s top value investing story comes via collegeanalysts.com and it deals with Warren Buffett mentioning he has been buying either Wells Fargo (WFC) or American Express (AXP). I would put my money on Wells Fargo. At one point during the year, Wells Fargo traded at about 8 times normalized earnings. Also, Buffett is very high on its CEO Mr. John G. Stumpf and if I am not mistaken quoted him in the latest Berkshire Hathaway letter. Finally, I believe Buffett has increased his holdings in Wells Fargo, but I have to look into that. Now without further to do, here are the weeks top value investing news.

Is Buffett Buying American Express (AXP)?

On CNBC last week, Buffett revealed he is buying more stock in either American Express or Wells Fargo. Here is the argument for the former.

The Natural Contrarian’s Way to Get Poor Quick

Scott Fraser calls himself The Natural Contrarian and a proven master of contrarian strategies. The only contrary thing about this type of investing and marketing is that it goes against all investing basics. Let’s see how this contrarian technique holds up against the logical contrarian

The “Missing” Berkshire Hathaway Letters (1969-1976)

There is a conspicuous gap between the last Buffett Partnership letter, written in 1969, and the first Berkshire Hathaway letter posted on the company’s website, written in 1978. This article unearths some of these missing letters.

New High Yield Dividend Stock: DCP Midstream Partners LP (DPM)

Looking through the 52 week stock lows the other day for some ideas for a new stock purchase I came across a couple of natural gas pipeline companies that had come down in price over the past few months. I looked over several other pipeline companies and found that most were down over the past six months, some were down over 40% so far this year. Here’s what if found…

The Day the Newspapers Died

Jeff Matthews considers last Saturday the day that newspapers died. If you have been considering newspaper stocks, be sure to think about this post first.

A particular Warren Buffett quote reminds me that doing nothing is good:

“”I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”-Warren Buffett

With 14% cash on hand, its tempting to get into some positions. Especially Microsoft which has been climbing the magic formula list this past week as it hits new lows. I continue to tell everyone I know that the magic formula has to be among the most undervalued books/sites/investing system around. Where else can I find a screen that looks for great businesses at a discount. Its only a matter of being patient and sticking with the system. For many years studies have proven that low P/E’s outperform the market, but investors/speculators continue to invest in companies that are trading at sometimes catastrophic P/E’s. Companies with high P/E’s are usually dangerous in this type of market as analysts expect companies to deliver outstanding numbers. What happens next? The company delivers great numbers (usually double digit growth ) but the stock gets pummeled (i.e. AAPL, GOOG,MSFT). How do low P/E’s fare during earnings season? Good. David Dreman highlights this in the book. Expectations for these companies are so low, no matter what kind of numbers the company reports, chances are a) a positive earnings surprise will make the stock soar (WFC)  or b) the news has been priced in already.

Although studies have shown that following Buffett into stocks has been a good idea, I highly do not recommend following ANY guru into a stock. For example, think about the number of people who blindly followed Mohnish Pabrai or Martin Whitman in the last year. Plus, digging into a company’s 10-K will help anyone looking into a company get a better picture about the company and where its heading. Personally, I have followed the Oracle into a couple of holdings only after checking out the companies story. Finally, when it comes to pharma’s, Warren Buffett has stated he recommends buying a basket of them.

Kraft (KFT)- This one seems to be the one he is buying the most

Wells Fargo (WFC) – High Quality Bank

US Bank (USB) – Another high quality bank with great management

WellPoint (WLP)-  Along with UNH , huge cash flow producers

UnitedHealth Group (UNH) – ^

Ingersoll-Rand (IR)- Also appears on Magic Formula screen

CarMax (KMX)- Haven’t looked into story

Glaxosmithkline (GSK)- Buy as basket

WABCO Holdings (WBC)- Have no idea

Bank of America (BAC)-

Sanofi-Aventis (SNY)- basket

US Gypsum (USG)- Moat will expand as competetors struggle with downturn

Lowes (LOW)- Will recover with economy

Also, there are several companies that Gurufocus does not list. I am guessing this is due to Warren Buffett purchasing the securities before GF was established. From the top of my head….

Moody’s (MCO)

American Express (AXP)

Coca-Cola (KO)

Proctor and Gamble (PG)

Disclaimer: I own PG and USB, I sold out of my holding in UNH a week ago.

Johnson Controls is currently trading at multiples it has not seen since the turn of the millennium. Although, it will not provide catastrophic returns, JCI should do fine as the economy and the market recovers.

This company supplies building controls and energy management systems, automotive seating, and batteries. -S&P Report

Below are some of the numbers
P/E: 14
Forward P/E: 11
ROE: 15%
ROA: 5%
EV/EBITDA: 8

Disclaimer: I own shares of JCI through an investment club

After acquiring Marmon Holdings, Buffett acquired a re-insurer from AIG financial and started his own bond insuring business. Apparently, the bond insurer will start doing business in New York and expand throughout the country.

On the other hand, David Dreman’s new article came out earlier in the week. Being a contrarian, he gave out a list of financials that should perform well in the coming years. Also, he does mention that the “worst might have been over.” Below is the list of banks being recommended. All have adequate size and attractive dividend yields.

• Bank of America (BAC)
• Wachovia (WB)
• Citigroup (C)
• KeyCorp (KEY)
• JP Morgan (JPM)

Along with the above names, David Dreman gave another list in which the banks are more volatile but might provide better returns.

• Washington Mutual (WM)
• Freddie and Fannie (FRE) & (FNM)

Being a student of Dreman, its satisfying knowing he is looking in the same location as I am. Although,I do have different picks than the above list, its great knowing we are fishing in the same lake. Currently, financials represent the majority of the Garcia Value Fund with 31% invested in the financial sector. My financials include American Express (AXP), US Bancorp (USB) , Wells Fargo (WFC), American Insurance Group (AIG),E-Trade Financial (ETFC), Moody’s Corp (MCO) and Capital One Financial (COF).

American Express has been beaten down for subprime fears and fears that consumer spending is slowing. I found this interesting as American Express has a great business clientele and little if any exposure to subprime. It currently trades at about 13 times forward earning which is amazing considering the moat the company has. Patient investors buying in the low 50’s will be rewarded 3-5 years from now.

US Bancorp (USB) and Wells Fargo (WFC) are both conservative banks with great management and great histories. Both banks have little sub prime exposure but for some reason are beaten down. Both banks also trade at lower valuations than their historical averages and post consistent ROE around 20%, which is above the industry average of 15%.

American Insurance Group (AIG) is another business trading at a discount. The big insurer stated its subprime exposure is manageable and re-affirmed the company’s growth of 10-12% for the next 5 years. Yet, the stock is trading below $60 with forward P/E of 8! Analyst have AIG earning $6.20/share this year. Assuming management is able to maintain a conservative growth rate of 8% for the next 5 years we can do a quick back of the envelope valuation using simple math.

• 2008 : $6.70 EPS
• 2009 : $7.23
• 2010 : $7.81
• 2011 : $8.44
• 2012 : $9.10

using a P/E of 10 on 2012 earnings we arrive at a $91 stock. Demanding my standard 34% margin of safety, the stock is a buy below $60. The stock currently trades at about $58.
I also have Moody’s (MCO) and Capital One Financial (COF) on my financials list. Both businesses follow the same idea that in 3 years these businesses will be more valuable than what the street is valuing them today.
Now time to comment on E-trade Financial (ETFC)*sigh*. The worst performer in the Garcia Value Fund and also the riskiest stock in the portfolio. The main thesis behind E-Trade is that the company will get rid of its subprime mess and stick to its retail operations. So far so good. The company is trying to make progress by launching a customer “win back” campaign. The street is valuing the whole business at roughly $1.6 billion . I think the business is worth more. Obviously, this is going to be a wild ride as management turns things around but hopefully being patient will result in a great investment as it has been a drag on the Garcia Value Fund.
In an earlier post, I mentioned I was going to read Ben Graham’s The Intelligent Investor. Well, change of heart. I read it twice in 07′ and decided it would be more interesting reading something else. So I decided of digging into my David Dreman collection. Which book will I re-read ? Undecided.
Finally, I would like to wish everyone a happy and safe New Year. 2007 has been an incredible year for me as I met a personal goal. 2008 will be better. God bless.

-Alex Garcia

Disclaimer: I own shares of US Bancorp (USB)