Anyone who reads "The Snowball," a great biography of Warren Buffett, knows the Oracle of Omaha is such a fanatical investor that his holiday shopping list might very well include stocks.
But which stocks would Buffett give out now for 2010 profits? His list would likely be heavy with retail, for two reasons:
- Retail is one of the sectors where Buffett was the most active in the third quarter, upping his position in Wal-Mart Stores (WMT, news, msgs) by 19.9 million shares.
- Buffett is the consummate contrarian, and the retail sector is one of the few areas where you can still be contrarian after a market rally that's lifted most stocks this year. A lot of investors have doubts about consumer spending because of unemployment and continuing problems in housing.
Which names? That's the challenge; Buffett never talks about the stocks he's only thinking of buying. So I checked in with Validea, an investment shop that has built computer models to "think" like investing greats, including Buffett.
If you believe the idea of programming computers to mimic investing greats sounds far-fetched, consider this: After Wal-Mart got hammered late last year, the retailer came up on Validea's Buffett portfolio, and it has stayed there all year. Sure enough, by the third quarter, Buffett's Berkshire Hathaway (BRK.A, news, msgs) had added heavily to its Wal-Mart position.
Plus, Validea's Buffett portfolio was up 41.5% in 2009, as of Dec. 10, compared with 22% gains for the S&P 500 Index ($INX). (Validea founder John Reese blogs in MSN Money's Top Stocks, by the way.)
Validea's portfolio is a good place to turn if you want a short list of retailers that Buffett might like. Its top picks right now: Wal-Mart, Coach (COH, news, msgs), Jos. A. Bank Clothiers (JOSB, news, msgs), Ross Stores (ROST, news, msgs), Family Dollar Stores (FDO, news, msgs), Aeropostale (ARO, news, msgs) and Buckle (BKE, news, msgs).
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Why Buffett likes retail
Before we get to why these companies are Buffett-like stocks, let's take a look at why betting on the consumer makes sense when the consumer economy still looks bleak.First, as Buffett might say, that negativity alone is a great reason. Retailers are a good contrarian play because so many smart investors -- not just the always-bearish crowd -- are so negative on the consumer.
Here are three good reasons to think these folks are wrong:
- Employment trends are becoming more favorable, and the economy is closer to actual job creation, says James Paulsen, the chief investment strategist at Wells Capital Management. The U.S. economy lost just 11,000 jobs in November, the smallest total in months and "a big event," says Paulsen. This trend has a positive effect because people with jobs worry less about losing them. That means they'll open up their wallets more, Paulsen believes.
- Next, people feel wealthier after a great year in the market. "I think consumers go from being cautious now, to doing their part for the economy a year from now," says Mark Zandi, the chief economist of Moody's Economy.com. Like Paulsen, he cites an increase in household net worth to $54 trillion from $48 trillion in the first quarter, because of a rising stock market and rising home values. This will encourage households to save less and spend more.
- Third, lower energy costs are helping the consumer. Paulsen calculates that debt and energy costs have fallen to close to 22% of disposable income, from 25% in the first quarter of 2008. That's back to levels at the start of the decade and lower than at any time during the 1980s. "People are so focused on this debt burden they are missing the fact that energy burden has come off far more," Paulsen says.
Now let's take a look at how Validea's seven Buffett picks match up with the qualities he looks for in stocks. (I outlined these in "10 investing basics from Buffett.")