Do As Warren Does

02/05/2008 12:00 am EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says following Warren Buffett’s lead is a profitable investing style and he mentions a couple of stocks that are in the Buffett mold.

As oracles go, Warren Buffett doesn't talk much. The renowned value investor is famously secretive about his maneuvers.

But actions speak louder than words. And Buffett's recent actions [show} that in the long run the US economy will be fine, so it's time to start nibbling on cyclical names that have been hit too hard by fears of economic Armageddon, like railroad stock Burlington Northern Santa Fe  (NYSE: BNI). Basic manufacturing stocks may be buys here for the same reason.

Since early December, shares of BNI have gone off the tracks. The stock has fallen more than 11% to trade recently at $77 a share, roughly a 52-week low. Buffett recently took advantage of the weakness and pounced on the stock. (It has since risen about ten points—Editor.)

Now for some more good news. You can still buy BNI for the same price Buffett got—or better. Berkshire Hathaway picked up $228 million worth of the stock for around $77 to $78 a share between January 10th and January 18th, according to Buffett first reported a position last April, when the price was higher than it is today. Berkshire Hathaway now holds 18% of the company.

BNI [also] has one of the key advantages that often explain Buffett's magic touch with stocks. Since it's hard to create a railroad, companies like BNI enjoy pricing power and protection from would-be competitors.

BNI "is a toll collector with a huge moat and high barriers to entry. You can't duplicate these franchises," says Stephen Shueh, the president of Alter Asset Management, a value investor who studies Buffett closely and owns shares of the railroad.

Third, since Buffett loves betting against the crowd, I'll take his BNI purchase as a signal that the market may be overreacting to signs of weakness in the economy—which at some point will return to solid growth, pushing stocks back up.

"It is the nature of capitalism to periodically have recessions," Buffett said in a CNBC interview in December. "It isn't the end of the world. As a matter of fact, for an investor it turns out to be the times when you make your best buys."

Graco (NYSE: GGG) is another beaten-down manufacturing play in the Buffett mold. The stock, down nearly 30% since August, traded recently at $35 a share. It has taken a hit even though it has many of the qualities that Buffett looks for, such as consistent long-term earnings growth, financial strength, and above-average return on capital, according to John Reese of Validea.

Reese's money-management firm uses screens designed to replicate the investment approaches of market gurus like Buffett. And Graco, which makes products such as compressors, pumps, and equipment used to apply paint, gets the highest score possible in Validea's screen that looks for stocks Buffett would like.

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