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Buying Stocks with Buffett's Buddy Bill Gates

By Michael Carr   |   Friday, 13 Feb 2009 09:11 AM

While thousands of investors follow every move of Warren Buffett, few seem aware that his bridge-playing buddy Bill Gates also is a value investor. Better recognized for his software fortune, Gates founded a private investment firm to diversify his personal portfolio beyond Microsoft.

Cascade Investment LLC has served as Gates's primary investment vehicle since 1995. Unfortunately, because the company only serves one investor, it is not required to make detailed filings on its performance. Investment information is only made public after Cascade acquires a significant stake in a company.

With the bulk of his wealth tied up in technology, it is not surprising that Cascade has large investments in what was once called the "Old Economy," representing everyday businesses that do the work of America. Recently, Cascade has been buying boring companies likely to survive tough economic times and recover strongly in the sure-to-come rebound.

Waste management company Republic Services (RSG) was a recent Cascade buy. This company owns and operates almost 100 trash transfer stations, about 60 solid waste landfills, and 33 recycling facilities.

Another buy was car dealer AutoNation (AN). With more than 550 new and used car dealerships, AN will suffer along with the automakers but will eventually turn around, making it a favorite of value stock-pickers in the current environment. Insiders increased their stakes as the price declined and billionaire Eddie Lampert also is a buyer.

These two stocks were the starting point to develop this week's screen. I am looking for stocks that meet a few criteria:

  • Companies are limited to the services sector, meaning they provide things consumers need in good times and bad.

  • Unlike Buffett, Cascade invests in smaller stocks that have solid market share but aren't necessarily the biggest in their sector. This screen excludes the largest stocks, the top 5 percent of market cap which accounts for an outsized portion of the stock market.

  • Gates is buying stocks that have outperformed their peers. We limit the screen to stocks that have been in the top 25 percent of the market based on performance over the past year.

    In addition to RSG and AN, this simple screen identified seven additional Gates-like buys.

    CenturyTel (CTL) recently acquired Embarq, and the combined telecommunications company will operate in 33 states with 8 million telephone lines, 2 million broadband customers, and about 400,000 video subscribers. The dividend yield of more than 10 percent at the recent price of 26.54 is well covered by earnings and appears to be safe.

    Embarq (EQ) offers investors an arbitrage opportunity. When CTL completes its acquisition, each share of EQ will be worth 1.37 shares of CTEL. At recent prices, EQ is trading near 35.10, which represents a 4 percent discount to the takeover value. There is also the possibility of another dividend payment by EQ prior to the deal closing. Aggressive investors can make potential returns of more than 5 percent in the two months they are waiting for the deal to close.

    Cintas (CTAS) is a uniform provider and has increased its dividend every year since going public in 1983. The company also has enjoyed 39 consecutive years of growth in sales and profits. At a recent price of 22.69, the market is valuing this steadiness at only 11 times earnings, making CTAS a bargain.

    Darden Restaurants (DRI) operates more than 1,000 restaurants under such well-known brand names as Red Lobster and Olive Garden. Dining-out sales appeared to have bottomed in October according to some analysts, making DRI a reasonable buy at the recent price of 28.75.

    Family Dollar Stores (FDO) is one of the budget retailers, like Wal-Mart and Dollar Tree, which have been seeing sales grow as the prolonged economic slump has driven consumers to find low prices on necessities like food and household items. Sales for the first quarter jumped 4.2 percent on a year-over-year basis, and FDO pays an industry best 2 percent dividend at the recent price of 26.61.

    Sherwin-Williams (SHW) is a household name that sells paint. The retailer has seen sales suffer recently, but analysts expect SHW to return to double-digit profit growth next year. Investors can earn a 3 percent dividend yield at the recent price of 46.94.

    Stericycle (SRCL) uses proprietary technology to provide environmentally responsible management of regulated medical waste for the health care industry. SRCL is the second-largest provider of regulated medical waste management services in the US. The company had annual average earning growth of 41.8 percent over the past 10 years. Recent price: 45.87.

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    MichaelCarr
    While thousands of investors follow every move of Warren Buffett, few seem aware that his bridge-playing buddy Bill Gates also is a value investor. Better recognized for his software fortune, Gates founded a private investment firm to diversify his personal portfolio beyond...
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    2009-11-13
     

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