Warren Buffett is the king of value investing and has made billions on his stock bets during the Great Recession. Investors the world-over track his investments and strategy. The problem is that many investors come late to the game and assume all of his current positions are still great value plays. Truth is that after five years of a bull market, there are only two dividend payers that I would consider from the Berkshire Hathaway (BRKB) portfolio.

How deep are your pockets?

Warren Buffett makes billions of dollars on two strategies. First, with an $89 billion portfolio, he has a virtually unlimited line of credit and can borrow even when the economy crashes. This credit line allowed him to spend nearly $16 billion to bailout companies in 2008 and 2009, from which he has made about $10 billion.

After buying stakes in these companies, he holds them for… well forever. He has enough ownership that he can influence the direction of the company and pretty much folds it into his empire. The fact that the stock may turn around and no longer be cheap doesn’t really matter.

This is where most investors have a problem. They see a stock in the portfolio that might have been there for years and mistakenly assume that it is still a value play or Buffett would have sold out. In fact, using data on price-to-earnings ratios from Morningstar, the average P/E for the 42 holdings in the portfolio is more than 10% over the 5-year average. That’s 10% overvalued compared to historical averages! Not what I would call a good deal.

That doesn’t mean that all the stocks in the portfolio are overpriced but you may need to do your homework to uncover the real value. Two of the most undervalued, and my favorites, are Deere & Company and U.S. Bancorp.

Shares of Deere & Company (DE) are priced at just 9.4 times earnings over the last four quarters, that is a discount of almost 32% over the five-year average. Besides being fairly cheap, the company is superbly run. Deere’s operating profit margin, the amount of sales left over after material costs and expenses, is 14% and above 84% of its competitors in the industry. The operating profit margin is one of my favorite metrics because it shows how well management controls costs. A higher margin means more money to shareholders.

Free cash flow took a dive last year to a negative $953 million, mostly on $440 million in capital spending and weak operational cash flows. Operations have rebounded this year but I don’t think the shares yet reflect the turnaround. Investors get a 2.5% dividend yield while they wait for a best-of-breed management team to boost valuation.

Deere has a good start in emerging markets where most of its future growth will come from. The company has been opening up the African market recently and hopes to get a foothold in a food market that could triple to $1 trillion by 2030.

U.S. Bancorp (USB) trades at a multiple of 12.4 times earnings, a discount of 19% on its five-year average. The bank’s operating margin of 40% is above 91% of peers in the industry. Cash flow is expected to rebound this year and the shares pay a sustainable 2.5% dividend yield.

The company is fighting a lawsuit brought by the U.S. Commodities Futures Trading Commission (CFTC) alleging that the bank allowed Russell Wasendorf of Peregrine to secure loans on client accounts for his own use. The brokerage firm folded in 2012 and Wasendorf was convicted of stealing more than $100 million over a period of 20 years. The bank asked that the case be thrown out on an inappropriate assignment of guilt. Even if the bank ends up having to settle, I doubt that it will materially affect the shares and the long-term thesis for the company remains strong.

It’s tough placing nearly $100 billion in investments. Warren Buffett has the luxury of making average returns on his existing portfolio since he can borrow at any time to take advantage of market fear. Most investors (pronounced, “you and me,”) need to make our investments with a more discerning eye on value. If things look too pricey, there is no problem with sitting back and waiting for the next market crash. Then you can take advantage of the opportunity and really invest like Buffett!

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