When you think of stocks owned by iconic investor Warren Buffett, chairman and CEO of Berkshire Hathaway, you’re usually thinking of buying them.
But despite the general strength of companies in which he invests, now isn’t necessarily a good time to purchase all of those stocks.
Morningstar lists three Buffett stocks to avoid now because they’re substantially overvalued, compared to its fair value estimates.
“These aren’t bad companies,” writes Morningstar investment specialist Susan Dziubinski. “In fact, quite the opposite: all three of these companies have carved out what Buffett would call economic moats [durable competitive advantages], and those moats are stable.”
Still, “we don’t think these companies are trading at an attractive margin of safety, which is another key pillar of Buffett’s approach to investing,” she said.
“In other words, the stocks of these three companies don’t look undervalued to us today. That’s why we think they’re Warren Buffett stocks to avoid, at least for now.”
Procter & Gamble, the Consumer Goods Giant
(PG)
Morningstar analyst Erin Lash assigns the company a wide moat and puts fair value for the stock at $126. It recently traded at $138.
“Procter & Gamble’s [fiscal] second-quarter results (5% organic sales growth and modest degradation in [profit] margins) suggest it's withstanding macro and competitive challenges quite well,” she wrote in a commentary.
But, “we are less sanguine on shares at current levels,” Lash said. “With six months in the rearview, we see little to warrant altering our near- or long-term outlooks for the business.”
Still, she noted that the company has posted 18 straight quarters of at least mid-single-digit -percentage organic revenue growth.
AON, a Big Insurance Brokerage
(AON)
Morningstar analyst Brett Horn gives the company a narrow moat and puts fair value for the stock at $261. It recently traded at $305.
Underlying revenue growth remained solid at 5% in the fourth quarter, he wrote. “The company did modestly underperform its peer Marsh McLennan MMC in organic growth, but for the most part, Aon still appears to be enjoying some tailwinds.”
Still, “shares are a bit overvalued, as the market appears to be overly-focused on the strong growth the company has seen recently, as opposed to the more modest level of growth we expect long-term.”
Marsh & McLennan, Another Big Insurance Brokerage
(MMC)
Horn assigns the company a narrow moat and puts fair value for the stock at $137. It recently traded at $163.
In the fourth quarter, “Marsh McLennan saw relatively strong underlying growth across both parts of its business [insurance and consulting],” he wrote in a commentary.
“We appreciate the near-term tailwinds the company is enjoying, but believe reversion to the more modest growth it has enjoyed historically is inevitable,” Horn said. “We see the shares as overvalued and believe the market is overly focused on recent performance.”
Still, “March & McLennan’s leading position in the brokerage industry would be difficult to displace,” he said.
