Category Archives: Berkshire Portfolio

Warren Buffett Remains Optimistic On Housing And How To Benefit From It

10 August 2012-

Warren Buffett’s Berkshire Hathaway (BRK.A) saw its recent profits fall 9% on losses from its derivatives portfolio. However, these derivative losses are unrealized (i.e. he has not sold the position) and are long term positions in equity indexes in US, Europe and Japan with a maturity date of 2018 and later. Buffett, outspoken on the problem with financial derivatives, has stated he will not likely be increasing additional derivative positions due to changes in financial accounting for derivatives.

While Buffett may not be purchasing more derivatives, these positions do represent a traditional view of this value-orientated investor; Buffett expects US, Europe, and Japan indices to see growth in the upcoming years. A simple strategy to mimic these expectations would be to purchase index ETFs, which is nothing new, or we can take a look into two sectors below that Buffett expects to benefit greatly from an increase in economic growth.

Housing: Last month, Buffett expressed increasing optimism toward the US Housing market in general. Granted, there are still weaknesses, but it’s clear that Buffett expects this sector to rebound in the next couple of years (remember, this value-orientated investor rarely likes to make 3 month speculations). Real-estate indices including the S&P/Case-Shiller 20-City have shown consecutive month to month growth after a prolonged trough. Berkshire Hathaway’s positions also include that of Clayton Homes, which builds, sells, finances and insures manufactured homes. Continued housing growth would help drive overall economic growth in the United States.

Buffett was recently quoted saying Europe’s financial issues are having a negative impact on United States and that weak residential housing is holding back growth. However, Buffett’s recent bid to purchase large amounts of distressed housing loans from ResCap’s bankruptcy offering show another story. Should he win the bidding, this would offer Buffett a large portfolio of loans (approximately 4 billion) that could see considerable upside if the housing market recovers. It appears that Buffett does think housing will recover and feels now that is a great time for purchase cheap assets.

Positions that would benefit from an increase in housing include Caterpillar (CAT) and Wells Fargo (WFC). Wells Fargo is the largest US Home Lender and Buffett’s 2nd largest position.

Transportation/Railroads: Another sector that would benefit heavily from US Economic growth is transportation. Buffett made headlines for his 2009 bet to buy-out BNSF (Burlington Northern Sante Fe Corp). This bet, the largest bet that Buffett has made, is making a prediction that when (and not if) economic growth comes roaring back, it will take the railroad and freight movement with it. Because the United States produces so many economic goods that must be transported, railroads can be more efficient than trucking in moving large quantities of goods across long distances. Buffett’s 2011 purchase of Lubrizol (engine and machinery lubricant) for $9 billion showed that Buffett expected engine and machines usage to increase (often a proxy for economic growth). Lubrizol also provides goods to emerging markets which are likely to see increased demand.

The transportation industry has recently seen a change in commodities it services. The recent use of cheaper natural gas has resulted in lower coal demand. Coal, which is largely transported by railroads, have thus impacted revenues of BNSF and its competitor Union Pacific Corp (UNP).

However, while usage of coal has dropped for these transportation stocks, the amount of business from shale, crude oil, and petroleum related shipments has increased dramatically. Demand for coal still remains as a crucial transportation driver, but increased demand for shale-related products is expected to see double-digit growth in the upcoming years. Whether the increase in demand for shale will off-set the diminished demand for coal remains to be seen, the transportation industry will likely see strong growth if US economic growth picks up.

Positions that would benefit stronger economic growth and increased demand for shale include mid-west Union Pacific Corp who are trying to capitalize on shale demand. Other railroad companies may warrant a look, but be aware that not all railroad companies have access to nearby cheap coal to transport. The continued drop in demand for coal would impact railroad companies that transport expensive coal first. Buffett’s 2009 buyout of BNSF deserves much praise; BNSF’s access to cheap and clean coal from the Powder River Basin and proximity to numerous shale fields is looking to be another profitable Buffett investment.

A Look At Yearly Returns Of Berkshire Top Holdings

10 Aug – 2012-

Performance Review Of Berkshire Hathaway Top Holdings.

1. Coca-Cola (KO)

  • Holding Value: $15.95 billion
  • Shares: 200,000,000
  • Stake: 8.4%

The stock returned 26% over the past 1-year period. Operating and profit margins are 23% and 18%, respectively. There was no fizz in last quarter’s numbers — revenue growth was 2.7%, while earnings were flat. P/E (forward) is 18.3. It has a solid 26% return-on-equity (ROE), a 0.53 beta (stock price is only 53% as volatile as the overall market), and a dividend yield of 2.6%.

2. Wells Fargo (WFC)

  • Holding Value: $13.39 billion
  • Shares: 394,334,928
  • Stake: 7.44%
  • Increased holdings by 10.63 million shares (+3%) since the previous reporting period.

Wells Fargo provides banking service primarily in the US.

The stock returned 50% over the past 1-year period. Operating and profit margins are 38% and 22%, respectively. Last quarter’s revenue increased 5%, while earnings grew 17% — a nice widening of margins. P/E (forward) is 9.2. It has a beta of 1.3 (stock price is 30% more volatile than market) and a dividend yield of 2.6%

3. IBM (IBM)

  • Holding Value: $12.87 billion
  • Shares: 64,395,700
  • Stake: 5.36%
  • Increased holdings by 489,769 shares (+1%) since the previous reporting period.

Big Blue provides information technology (IT) products and services worldwide.

The stock returned 22% over the past 1-year period. Operating and profit margins are 21% and 15%, respectively. Last quarter’s revenue decreased 3%, while earnings grew 6% — so margins widened, a positive. P/E (forward) is 12. It has a fat 74% ROE (though debt load increases a company’s ROE, so IBM’s fairly sizable debt load makes this number better than it would otherwise be), a beta of 0.67 and a dividend yield of 1.7%.

This stock looks potentially appealing, despite its recent flat revenue growth. It has some solid financial stats and promising future prospects (in artificial intelligence involving its “HAL” robot and data analytics). Apparently Buffett thinks so, too — he only began buying this stock in 2011.

4. American Express (AXP)

  • Holding Value: $8.74 billion
  • Shares: 151,610,700
  • Stake: 13.02%

American Express provides banking and credit card products, as well as travel-related services worldwide.

The stock returned 36% over the past 1-year period. Operating and profit margins are 24% and 17%, respectively. Last quarter’s revenue grew 3%, while earnings were flat. P/E (forward) is 12.3. It has a beta of 1.8 and a dividend yield of 1.4%.

5. Procter & Gamble (PG)

  • Holding Value: $4.85 billion
  • Shares: 73,254,136
  • Stake: 2.71%
  • Decreased holdings by 3.5 million shares (-5%) since the previous reporting period.

P&G is a global consumer products company.

The stock returned 15% over the past 1-year period. Operating and profit margins are 18% and 13%, respectively. Last quarter’s revenue decreased 3% while earnings grew 45% — so margins widened, a positive. P/E (forward) is 16. It has a beta of 0.44 and a dividend yield of 3.4%.

6. Kraft Foods (KFT)

  • Holding Value: $3.19 billion
  • Shares: 78,017,165
  • Stake: 4.33%
  • Decreased holdings by 9.02 million shares (-10%) since the previous reporting period.

Kraft Foods manufactures and sells packaged food products worldwide.

The stock returned a tasty 25% over the past 1-year period. Operating and profit margins are 14% and 7%, respectively. Last quarter’s revenue decreased 4%, while earnings grew 5%. P/E (forward) is 15. It has a beta of 0.53 and a dividend yield of 2.8%.

7. Wal-Mart (WMT)

  • Holding Value: $3.46 billion
  • Shares: 46,708,142
  • Stake: 1.14%
  • Increased holdings by 7.67 million shares (+20)) since the previous reporting period.

Wal-Mart operates discount stores under the Wal-Mart name and warehouse club stores under the Sam’s Clubs name. It’s been making further headway into the financial services arena in recent years.

The stock returned 55% over the past 1-year period. Operating and profit margins are 6% and 3.5%, respectively. Last quarter’s revenue grew 8.5%, while earnings grew 10%. P/E (forward) is 14. It has a beta of 0.41 and a dividend yield of 2.2%.

8. US Bancorp (USB)

  • Holding Value: $2.28 billion
  • Shares: 69,039
  • Stake: 3.61%

U.S. Bancorp provides banking and financial services in the US.

The stock returned 57% over the past 1-year period. Operating and profit margins are 43% and 30%, respectively. Last quarter’s revenue grew 9%, while earnings grew 18% — so margins widened, a positive. P/E (forward) is 11. It has a beta of 1.0 and a dividend yield of 2.4%.

9. Johnson & Johnson (JNJ)

  • Holding Value: $1.98 billion
  • Shares: 29,018,127
  • Stake: 1.06%

Johnson & Johnson is a global health care products company.

The stock returned 16% over the past 1-year period. Operating and profit margins are 25% and 13%, respectively. Last quarter’s revenue decreased 1%, while earnings dropped 50% — so margins narrowed, a negative. P/E (forward) is 12.5. It has a beta of 0.55 and a dividend yield of 0.6%.

A red-flag on this one is the good number of quality control issues over the recent couple years.

10. ConocoPhillips (COP)

  • Holding Value: $1.64 billion
  • Shares: 29,100,937
  • Stake: 2.25%

ConocoPhillips is involved in the exploration, production and transportation of crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen throughout the world.

The stock returned 25% over the past 1-year period. Operating and profit margins are 9% and 5%, respectively. Last quarter’s revenue decreased 17%, while earnings dropped 33%. P/E (forward) is 10. It has a beta of 1.1 and a dividend yield of 4.7%.

I’d stay away from this one. It has a 5-year PEG of -5, meaning analysts expect negative earnings growth over the next five years.

And here’s a bonus…

11. DirectTV (DTV)

  • Holding Value: $1.14 billion
  • Shares: 22.999,600
  • Stake: 3.51%
  • Increased holdings by 2.65 million shares (+13%) since the previous reporting period

DirectTV provides digital TV primarily via satellite in the US and Latin America.

The stock returned 18% over the past 1-year period. Operating and profit margins are 17% and 9%, respectively. Last quarter’s revenue growth was 10%, while earnings grew 1% — so margins narrowed, a negative. P/E (forward) is 9.5. It has a beta of 0.96.

Warren Buffett Likes Bank Stocks

25 July 2012
Warren Buffett likes bank stocks, just not investment banks. And for good reason.

By avoiding common stock bets on investment banks like JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley the “Oracle of Omaha’s” financial sector share investments have greatly outperformed most other investors.

Of course, Buffett made preferred share investments in Goldman and Bank of America during the height of the crisis, but these were essentially super-safe loans that guaranteed a return and did not reflect his common stock plays.

In fact, as Buffett continued to hold banks stocks as a key part of a U.S. economic recovery investment, the value investing guru has kept his chips smartly behind Wells Fargo — which is projected to end 2012 as America’s most profitable bank — even if the battered share prices, titanic balance sheets, and boom and bust earnings of money center giants lure some of the sectors smartest investors into sub-par investments.

Although Buffett’s likely to have about the same insight as the “Average Joe” when it comes to a multibillion-dollar “London Whale” trading loss at JPMorgan, investment bank ratings downgrades, and a market manipulation probe that may start with Barclays and spread across Wall Street, his continued investment in the stability of traditional lenders like Wells Fargo, US Bancorp, and M&T Bank, and an investment in credit-card giants American Express, Visa, and MasterCard have greatly outperformed mega-bank stocks.

Since the 2008 Wall Street crash pummeled most bank stocks and a March 2009 stock bottom led to a tripling of the shares of megabanks like Citigroup and Bank of America, and a doubling of JPMorgan and Goldman Sachs within a span of just over a month, many financial sector investors and analysts forecast that those gains could be replicated.

nstead, the nation’s largest investment banks have underperformed, even as their shares gyrated upwards on misplaced optimism of a durable trading or deal making surge.

From March 2009 to May 2009, the largest investment banks were among the financial sector’s top performers, driving many investors including hedge fund titans John Paulson and David Tepper of Appaloosa Management strongly into the stocks of Citi and Bank of America. Since then, Morgan Stanley, Bank of America, Goldman Sachs, and Citigroup shares have all lost over 15 percent — and are among 10 S&P 500 bank stocks out of 85 in total that have lost double digits since May 2009, according to Bloomberg data.

While JPMorgan has gained over 17 percent since then, the Bloomberg data shows that Buffett financial sector picks like Wells Fargo, US Bancorp, M&T, American Express, Visa, and MasterCard have dramatically outperformed those returns. Wells Fargo is up over 30 percent since May 2009, US Bancorp and M&T have posted over 50 percent share gains, and American Express has doubled. Recent new Buffett financial sector picks like Visa and MasterCard are among the financial sector’s best performers in the past 12 months, posting 40 percent-plus gains to go against the Financial Select Sector SPDR’s [XLF  14.27    0.055  (+0.39%)   ] 2 percent share loss.

The data should tell investors that in spite of the press given to capital markets players with volatile earnings and recently battered share prices, they may be better off following Buffett into less glamorous banks stocks that are exposed to consumer and mortgage lending growth, and credit card names that may track rebounding consumer spending.

Fundamental investors may also have reason to follow Buffett, even if it’s less obvious whether superregional banks are a value investment. Following the results of the U.S. Federal Reserve [cnbc explains] stress tests in March, it was many of Buffett’s investments like Wells Fargo, U.S. Bancorp, and American Express, which led the way on share buyback plans and dividend boosts. Wells Fargo boosted its dividend 83 percent and indicated accelerated buybacks to a program launched in 2011. American Express unveiled a $5 billion buyback program of $5 billion and upped its quarterly dividend. Meanwhile U.S. Bancorp boosted its dividend by 56 percent and targeted $3.3 billion in buybacks.

In buying back stock, banks will lower total outstanding shares, thus boosting the proportion of earnings attributable to remaining shares. Using International Business Machines [IBM  191.08    0.74  (+0.39%)   ] as an example, Buffett explained in his annual letter in February how share buybacks can be a hedge to the prospect that a company’s shares underperform.

“When Berkshire buys stock in a company that is repurchasing shares, we hope for two events,” Buffett explained. “First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time, as well.” As a result, Buffett has a fundamental reason not to be concerned if the stock performance of IBM and Wells Fargo — both among his largest holdings with buyback plans — underperform in the near term.

As of March 31, Wells Fargo was Buffett’s second-largest stock investment at $13.2 billion or 7.42 percent of the company’s shares, while he held 13 percent of American Express shares worth over $8.8 billion, and $2.2 billion worth of U.S. Bancorp shares, or 3.6 percent of the company’s float.

But even without Buffett’s buyback math, the expected earnings prospects of traditional mortgage and credit card lenders may trump capital markets-oriented players. In March, we noted that because of Wells Fargo’s near 30 percent annual earnings growth trajectory, Buffett may end 2012 as the largest investor in America’s most profitable bank.

After JPMorgan unveiled a derivatives-related trading loss in May that may exceed $2 billion, Wall Street analyst now project that Wells Fargo will end 2012 as the most profitable U.S. bank, earning $17.7 billion for the year, according to Bloomberg compilations of forecasts. That contrasts to the $17.2 billion in adjusted net income that JPMorgan is expected to earn this year. Wells Fargo will earn the lion’s share of its profit and revenue from mortgage, business and credit-card lending, while JPMorgan’s earnings will be a mix of those businesses and its global investment banking operations.

It’s the distinction between Wells Fargo’s quick earnings ascendance relative to JPMorgan — the longtime profit leader throughout the financial sector — that may best exemplify the simplicity of Buffett’s investing plan relative to the elusive allure of investment banking profits.

JPMorgan, like Goldman Sachs, is undoubtedly a leader in investment banking, with a top three position in most key merger advisory and debt and equity underwriting markets. Still, a near 30 percent year-over-year lull in those businesses means that even top brands aren’t expected to post strong earnings. In fact, it’s the counterintuitive accounting gains that investment banks may post on the falling value of their debt after Moody’s slashed sector ratings that may be among the biggest positive surprises in second-quarter earnings.

Although many, like JPMorgan Chief Executive Jamie Dimon, expect that investment banking revenues will have a big comeback as companies enter a cycle of mergers and initial public offerings [cnbc explains] that was postponed by the European debt crisis and political gridlock in Washington, some think the industry’s woes may be lasting.

“[We] think the slowdown in capital markets revenues is more structural than cyclical,” wrote Standard & Poor’s credit analyst Richard Barnes in a July 2 note that outlined why the ratings agency sees new regulations, high expense and lasting macroeconomic risks as reason to question whether investment banks will even be able to out return their cost of capital in coming quarters and years.

The prospect of trading losses like those booked by JPMorgan and added political and regulatory pressures on the heels of a $450 million fine that Barclays paid to U.S. and U.K. regulators for its manipulation of short-term interest rates, and which cost CEO Bob Diamond his job, augur as added risks. Meanwhile, S&P’s outlook for investment banks is similar to what drove Moody’s to ratings cuts in June.

As it turns out, its Buffett plays like Wells Fargo and U.S. Bancorp remain a source of financial sector strength headed into second-quarter earnings, which are likely to be relatively disappointing. On Thursday, Credit Suisse analyst Moshe Orenbuch cut his earnings estimates for JPMorgan, Citigroup, and Bank of America because of their sensitivity to the weakness of capital markets. Among large-cap [cnbc explains] banks, Orenbuch left his earnings estimates for Wells and U.S Bancorp unchanged, while noting that throughout the industry, weaker capital markets revenue may be offset by loan growth and cost cuts.

Expectations of a housing construction rebound and mortgage demand have even given some reason to expect that Wells Fargo may surprise on the upside for the remainder of 2012. Amid continued uncertainty about the global economy, JPMorgan analyst Vivek Juneka said Wells Fargo was his best large-cap bank investing idea, in a June 2 sector outlook that cited the bank’s mortgage origination and loans businesses as standing apart from peers. Among mid-cap and small-cap banks, JPMorgan analysts highlighted First Horizon National as a top pick.

For those who are ready to throw in the towel on large-cap bank stocks like JPMorgan, Bank of America, and Citigroup, following Warren Buffett’s focus on capital returns, stable business models, and faster-than-industry average growth may be a simpler and more effective strategy.

Source –

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