On Tuesday, Berkshire Hathaway (BRK-A) filed its most recent form 13-F, which details the investment conglomerate’s holdings at the end of the fourth quarter of 2008. Chairman Warren Buffett, as well as his colleague at auto-insurer Geico, Lou Simpson, manage Berkshire’s stock portfolios. It should be noted that this disclosure does not include Berkshire’s international stock holdings. Berkshire also sometimes receives exemptions from the SEC to delay the disclosure of some of the stocks it is buying, in order to avoid other investors trying to front run the firm. Therefore, Berkshire could still be buying some stocks that it has yet to disclose.
In general, though, this was not a quarter where Berkshire was a net buyer of stocks. In fact, Berkshire continued to re-allocate capital during the fourth quarter, which really isn’t that surprising, given the opportunities in the markets today. In my opinion, Berkshire sold some of its position in stocks that have held up relatively well over the past year, and that are also somewhat newer positions to the portfolio. On the former, these stocks are generally defensive names—think Johnson & Johnson (JNJ) and Procter & Gamble (PG)—that have proven to be a flight to quality for many other investors, and as a result have held up well relative to the rest of the market. On the latter, since Johnson & Johnson was a relatively newer position to the portfolio, by selling it, Berkshire’s tax liability would be much less than had it sold something that it had held for a very long time. As for Procter & Gamble, Berkshire was forced to use a more recent cost basis on this name when P&G acquired long time Berkshire holding Gillette a few years ago. As such, selling some of P&G would also result in a relatively low tax liability for Berkshire.
Given that Buffett wrote an article last fall indicating that he was bullish on American stocks over the next 3 to 5 years, many investors expected to see a bevy of new investments in Berkshire’s equity portfolio. What has actually happened, though, is that Berkshire has become a lender of last resort to companies in need of debt, or debt refinancing. Given that the debt markets have become essentially dysfunctional, and have all but dried up, Berkshire has been able to extract equity like returns from good companies in need of debt financing. Two recent deals that demonstrate this are Berkshire’s financing of Harley Davidson (HOG) at a lofty 15% coupon over the next five years, as well as Berkshire’s refinancing of Tiffany (TIF) debt at a 10% coupon. With equity-like returns like that—which are guaranteed because they are debt instruments—its no wonder Berkshire re-allocated some of its capital in this manner.
Reductions
Berkshire decreased its stake in the following companies over the fourth quarter. The largest reduction was to Johnson & Johnson, followed by Procter & Gamble, and then by US Bancorp (USB).
• Johnson & Johnson
• Procter & Gamble
• US Bancorp
• Conoco Phillips (COP)
• Carmax (KMX)
• United HealthGroup (UNH)
• Wells Fargo (WFC)
As I’ve also noted previously, Berkshire received shares in Constellation Energy (CEG), which it had received when Constellation pulled out of its deal to be acquired by Berkshire subsidiary Mid-American. Throughout January and February, Berkshire has been aggressively selling this name.
Additions
Berkshire did add to a few positions during the fourth quarter as well. As I’ve noted in a prior article, Berkshire has continued to accumulate shares in Burlington Northern (BNI), and by the end of January owned more than 22% of the company. Here are all of the companies that Berkshire added to over the last quarter:
• Burlington Northern
• NRG Energy (NRG)
• Ingersoll-Rand (IR)
• Eaton Corp. (ETN)
The last of these, Eaton, was a new addition to the portfolio during the third quarter, and it appears as though Berkshire has continued aggressively adding to the name.
New Position
Berkshire did buy one new stock during the fourth quarter, initiating a position in Nalco Holding (NLC), which is a company that offers water treatment products and services.
• Nalco Holding
Unchanged Positions
There were a number of unchanged positions during the quarter, though, Berkshire’s stake in USG (USG), has actually increased, as Berkshire intends to convert some of its debt into additional shares of USG, which was recently approved by USG shareholders. Here is the listing of the unchanged positions for Berkshire during the fourth quarter:
• American Express (AXP)
• Bank of America (BAC)
• Coca-Cola (KO)
• Comcast (CMCSA)
• Comdisco (CDCO)
• Costco (COST)
• Gannett (GCI)
• General Electric (GE)
• GlaxoSmithKline (GSK)
• Home Depot (HD)
• Iron Mountain (IRM)
• Kraft Foods (KFT)
• Lowes Companies (LOW)
• M&T Bank (MTB)
• Moodys (MCO)
• Nike (NKE)
• Norfolk Southern (NSC)
• Sanofi Aventis (SNY)
• SunTrust Bank (STI)
• Torchmark (TMK)
• USG
• Union Pacific (UNP)
• United Parcel Service (UPS)
• Wabco Holdings (WBC)
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wellpoint (WLP)
• Wesco (WSC)
I’m often asked whether it is more advantageous to follow Berkshire’s stock picks or to just follow Berkshire. My answer is always the same. While one can try to game the system by “cherry-picking” Berkshire’s stock picks, I’ve always felt it is better to just follow Berkshire. While Buffett is a great investor, he’s not perfect, so just because he buys a particular stock, does not mean it will automatically go to the moon. By following Berkshire, on the other hand, one can benefit from Berkshire’s stock positions on a portfolio, or aggregate, basis. More importantly, though, by following Berkshire, one can benefit from deals and terms that are only available to a company like Berkshire---think the recent Harley and Tiffany debt offerings.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
