Investors are always on the prowl for stocks that would conceivably appeal to Berkshire Hathaway’s (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett. He likes established businesses that throw off ample cash flow and have a strong moat to keep competition at bay. We can speculate on which stocks fit the bill, or we can simply buy stocks that Buffett already owns. Thanks to the recent market pullback, a pair of these high-quality businesses have back-slid with the market, allowing you to load up while they’re bargains.

Buffett may have had the prescience to unload these and other stocks in early July before the market fell, but he’s a long-term investor, so even though we only know what he owned as of June 30, he likely still has a $40 million stake in Bank of New York Mellon (NYSE: BK) and a $20 million position in Ingersoll-Rand (NYSE: IR).

Bank of New York
This venerable financial institution is just eight years younger than the United States and has lived through many financial and economic crises before. Unlike the boom-and-bust investment banks such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C), Bank of New York has been on a far more conservative path. The bank handles a range of administrative affairs such trade clearing, custodial services of financial documents and transactions, employee investment plans and securities lending. Even its asset management arm takes a prudent approach, focusing as much on capital preservation and diversification as it does on capital appreciation.

The approach is actually winning the firm new customers in these sobering times. Assets under management (AUM) rose 3% sequentially in the second quarter to a record $1.3 trillion. The bank also takes a conservative approach to its own balance sheet, holding 12.6% of assets in Tier One capital, above the 7% threshold required by regulators.

Despite its risk-averse culture, Bank of New York has seen its stock shunned along with other financial institutions. Shares have fallen from $30 to near $20 since early April. Admittedly, the very low interest rate environment is keeping profits from growing (the bank captures higher spreads when fixed-income rates are higher). So investors may be fixating on the fact that per share profits are likely to be flat this year at around $2.25. Shares trade for about nine times that figure.

Warren Buffett first showed his hand with this play in the third quarter of 2010, buying stock at about $25 a share. He must have figured they were a bargain, since they had been trading at around $45 back in early 2008. He saw an early profit in the position, but is now underwater, with shares trading near $20. Shares never even got below $20 during the depths of the financial crisis. You have to go back to 1997 to find the last time that this stock was in the teens. That’s the kind of entry point that Buffett would really like.

Ingersoll-Rand
This 106 year-old industrial firm has been trading like a high-beta tech stock in recent years. Shares plunged from the $45-range to below $20 in the last recession, rebounded to $50 this spring, and have plunged anew to $20 in recent days. Buffett originally acquired shares at $40, has bought and sold since, and has an estimated current average basis of $38. Just like Bank of New York, he’s underwater here too. He’s likely staying put, because once you dig into Ingersoll-Rand’s business model, the appeal becomes obvious.

This diversified industrial concern is involved with heating systems, air-conditioning systems, energy efficiency equipment, security equipment and even golf carts. The growth prospects for each of these segments are moderate, but they are very strong cash flow businesses. Although the company just treaded water in 2008, Ingersoll-Rand has generated at least $400 million in free cash flow in every other year since 2004.

The subpar year in 2008 was certainly a wake-up call for management, which subsequently embarked on a far-reaching cost saving plans to trim the fat in all of the company’s divisions. This led the company to predict in the spring of 2010 that earnings per share (EPS) could double to around $5 by 2013, assuming the global economy was improving by then. Even without a major economic upturn, it is keeping its word. Per share profits are on track to rise roughly 25% this year to around $3, and analysts think it could exceed $3.75 in 2012.

How can profits grow at such a solid clip when the economic climate is so lousy? Because Ingersoll-Rand has completed only phase one of its restructuring efforts, and phase two, highlighted by further cost reductions, is now getting underway.

Analysts at Sterne Agee are believers in the turnaround: “We continue to believe IR is ideally suited to leverage not only a strong multi-year recovery in global capital spending but also the long awaited rebound in North American commercial construction,” they recently wrote. They figure shares, even after digesting the reality of a slowing economy, are still worth $52, or more than 60% above current levels. To support the stock, the company has embarked on a share buyback plan that could shrink the share count by 5% by the end of this year.

Back to that 2013 long-term plan that management has in place… By the time phase two of the turnaround plan is in place, Goldman Sachs sees EPS rising to $4.55. This makes the stock, at a recent $30, a veritable bargain, because it is currently valued at 6.6 times that estimate. Warren Buffett would likely agree.

Action to Take –> This continues to be a great market for blue-chip bargains. These stocks are falling on fears of economic weakness, but have been proven winners in the long-term. With both stocks trading for less than 10 times projected earnings, these kinds of bargains may not last.

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