Overlooked Buffett Stocks

11/04/2014 9:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

At 84 years of age, Buffett has a lifetime of knowledge and is considered a pro at finding easy-to-understand businesses that have a knack for beating the market, notes Marshall Hargrave in Daily Profit.

Rather than look at his well-known, large-cap holdings, we prefer to look at some of the smaller stocks that Berkshire-Hathaway (BRK-B) has been showing a keen interest in of late.

Here's a look at three of Buffett's top three overlooked ideas.

USG Corp. (USG)

During the second quarter, Buffett's Berkshire added to its USG position by 11%. Berkshire is the company's largest shareholder, owning 27% of USG.

USG is a producer of building products and is the largest maker of drywall in North America. Its balance sheet has been strengthened since the housing bubble thanks to debt refinancing and the recovering demand for drywall.

2012 was the first year that USG saw an increase in wallboard prices since 2006. Going forward, the continued recovery in the residential and commercial will be a big positive for the building supply company.

USG trades at a forward P/E (price-to-earnings ratio based on next year's earnings estimates) of just 12. Coupling that with Wall Street's expected earnings growth rate for the next five years and USG's P/E-to-growth rate (PEG) ratio is 0.9, anything below a 1.0 is considered a growth at a reasonable price stock.

Chicago Bridge & Iron (CBI)

Although shares of Chicago Bridge are down 35% year-to-date, Berkshire was upping its stake during the second quarter. The Omaha-based conglomerate increased its stake in Chicago Bridge by 12%, bringing its ownership in the company to just under 10%.

Chicago Bridge is a provider of engineering services to companies in the energy, petrochemical, and natural resources sectors. Its $3 billion acquisition of The Shaw Group was a major deal for the company and boosts its capabilities in the nuclear building market.

It looks as if Chicago Bridge is all set to benefit from the rising demand of energy infrastructure projects in the oil sands and liquid natural gas markets. Chicago Bridge's valuation is very compelling. Its forward P/E ratio is 9.2 and its PEG ratio is a low 0.7.

VeriSign (VRSN)

Berkshire upped its stake in VeriSign by 11% during the second quarter. Now Buffett's Berkshire owns just over 10% of the company.

VeriSign manages domain names; the firm is the exclusive registry for .com names and this agreement isn't up for renewal until the end of 2018.

The other angle for VeriSign is its Network NIA service business, which provides cyber security services. As the adoption of cloud computing continues to rise, companies of all sizes will look to boost spending to protect their data.

All in all, VeriSign remains a solid recurring cash-flow business. With that cash, VeriSign remains committed to boosting shareholder value with buybacks. Over the last five years, the company has managed to reduce shares outstanding by over 36%.

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