Stocks in a Slump, and Look Who's Buying

Smart Investors Are Scouting Out Deals -- And Yes, That's Warren Buffett

While many shareholders have fled the stock market recently, some big-name investors have been buying big-time.

These savvy investors are sifting through the wreckage of financial and consumer stocks, housing shares and battered tech companies to find what they believe are future market darlings, quietly amassing stakes in names as diverse as Kraft Foods, Wells Fargo and J.C. Penney.

The billionaire investor Warren E. Buffett, for example, this month disclosed ownership of 132 million shares of Kraft. That amounts to an 8.6 percent stake in the maker of Ritz crackers, Philadelphia cream cheese and Maxwell House coffee. Nicknamed the Oracle of Omaha for his investing savoir faire, Buffett also took a stake in drugmaker GlaxoSmithKline and raised his bets on Johnson & Johnson, the health-care products manufacturer; U.S. Bancorp; and Wells Fargo.

Bill Miller, a money manager at Legg Mason known for his 15-year winning streak against the Standard & Poor's 500-stock index that ended in 2006, revealed this month that he scooped up J.C. Penney stock in the last three months of 2007 as shares of the department store fell by nearly a third.

The chosen targets are not just domestic companies. Undeterred by market turmoil that has turned global, some investing pros are picking up beaten-down international companies that others wouldn't go near.

"One thing you can say about events like this is, sometimes the baby gets thrown out with the bathwater," said Ray Mills, portfolio manager of the International Growth and Income fund at T. Rowe Price. He recently took a stake in Munich Re, a German reinsurer, and increased his position in Allied Irish Bank, among other names.

So what gives? What do these buyers see that the rest of us don't?

Those who follow Buffett say his recent purchases follow his simple investing style: Bet on good management and businesses you can understand and analyze, priced at a level that leaves room for future growth.

"He bought Kraft because they make dozens of products that are likely to continue to be in demand," said Frank Betz of Carret Zane Capital Management, which does not own Kraft stock but has shares of Wells Fargo. Betz said Buffett has had a large position in Wells Fargo for years. "But he's increased it significantly because almost all of the major financials and banks have been hammered down because of the so-called subprime crisis. . . . Insofar as we know, Wells Fargo was not a major player in subprime underwriting or investing."

Robert Millen, chairman and portfolio manager of Jensen Investment Management, puts it more bluntly.

"Wells Fargo -- that's one we feel is significantly undervalued in the market today. We think the market has taken its price down way too far," said Millen, adding that his firm had enhanced its position in Wells Fargo for much of the latter half of 2007.

The way Millen sees it, Wells Fargo has competitive advantages: a conservative credit culture, solid management, locations in fast-growing areas of the country and the ability to sell more services to existing customers. Furthermore, he noted, the company is well positioned to weather the ups and downs of interest rate cycles, with a large portion of its revenue generated by fee income as opposed to underwriting.