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Sunday, November 18, 2012

Heavier Trading Activity Continues at Berkshire

Warren Buffett speaking to a group of students...
Warren Buffett speaking to a group of students from the Kansas University School of Business (Photo credit: Wikipedia)
By Greggory Warren | Senior Stock Analyst
chicago, Nov.18, stock trade .- Having had a chance to take a much closer look at the changes that were made to Berkshire Hathaway's (BRK.A)/(BRK.B) stock holdings during the third quarter, we continue to  view the equity investment portfolio at the firm as a work in progress.
While Warren Buffett has had (and continues to have) an outsized influence on the makeup of the portfolio, as time goes on we are getting more and more glimpses of just how his two lieutenants, Todd Combs and Ted Weschler, will approach their own portfolios. And while Buffet did make a point during the third quarter of noting that these two managers would be working with a “bank” of about $ 4 billion each (exclusive of any gains/losses on capital that has already been put to work)–up from $ 1.75 billion each at the end of last year and $ 2.75 billion each at the end of the first quarter–we think that this amount could rise even higher in the near term, given the level of selling activity we continue to see in some of the larger legacy positions in the portfolio. This willingness on Buffett’s part to sell some of his own legacy holdings in order to fund the investment portfolios being run by his two lieutenants speaks volumes, in our view, about how much faith he has in Weschler and Combs, both of whom have been actively managing money for Berkshire for less than two years.
That said, Buffett continues to hold sway over a meaningful amount of the firm’s equity portfolio, and we don’t believe that will change much in the near- to medium-term. This should not be surprising to those who have followed Berkshire over the years, given that Buffett (and his sidekick Charlie Munger) have been the driving force behind most of the larger holdings in the firm’s investment portfolio over the last four decades.
That’s not to say that Lou Simpson, the now-retired manager of the investment portfolio at GEICO (Berkshire’s auto insurance subsidiary), did not have an influence; it’s just that his position sizes tended to be in the hundreds of millions, whereas Buffett’s have traditionally gone well into the billions. At the time that Simpson announced his retirement in the third quarter of 2010, he was managing a total of about $ 4 billion in equities, accounting for 8% of Berkshire’s total stock holdings at the time. This compares to the $ 8 billion that Combs and Weschler will be managing on a combined basis, with the two men holding sway over 11% of the insurer’s equity holdings at the end of the third quarter of 2012. This means that Buffett continues to manage about 90% of the equities in Berkshire’s investment portfolio. The big positive, though, from a succession perspective, is that each of Buffett’s two lieutenants is now managing about 5.5% of the total equities held by Berkshire, much closer to the level that Simpson had managed over the 30 years that he was running theinvestment portfolio at GEICO, and higher than we would have expected given the length of time that each of these two managers has been with the firm.
Berkshire Hathaway’s Top 10 Stock Holdings (as of 09/30/12)
Even with the heavier bouts of buying and selling activity we’ve seen this year in Berkshire’s equity portfolio, the list of top 10 stock holdings looks pretty much like it did at the end of 2011, with the one notable exception being Johnson & Johnson(JNJ), which has been supplanted by DirecTV(DTV) due to a combination of major sales of shares of the health-care firm and meaningful purchases of the satellite television provider.
We would also note that Kraft Foods, which Berkshire sold once again during the third quarter, is on the brink of falling off the list, and likely will not make the top 10 holdings next quarter, given the early October split-up of the firm into Kraft Foods Group(KRFT), which retained its grocery operations, and Mondelez International(MDLZ), which held on to the firm’s global snack food operations. While Berkshire has been selling shares of Kraft Foods fairly regularly over the last two years, eliminating another 28.4 million shares (equal to 48% of its stake) during the third quarter, it still held 30.4 million shares at the end of the period (worth more than $ 1.2 billion in total). Between the split, and our belief that Berkshire will keep looking at Kraft (and its successor firms) as sources of cash, we’re doubtful that it will remain a top 10 holding at the end of the year.
Looking more closely at the selling activity among the remaining top 10 holdings, Buffett sold another 6.8 million shares of Procter & Gamble(PG) during the third quarter, following up on sales of 13.6 million and 3.5 million shares during the second and first quarters of 2012, respectively. As a result, Buffett has now sold more than 30% of the holdings in Procter & Gamble since the start of the year (a stake that is comprised primarily of shares that Berkshire received in 2005 when Procter & Gamble bought Gillette–a holding that Buffett had originally established in 1989). At 4.9% of the reported stock portfolio at the end of the third quarter, it still remains a large position for Berkshire, but has certainly not been untouchable, as Buffett previously sold shares in the fourth quarter of 2008; the fourth quarter of 2009; and the first, second, and third quarters of 2010. We continue to view it as a source of cash for Buffett as he looks to free up capital longer-term for his two lieutenants.
The only other sales among the top 10 holdings at Berkshire involved U.S. Bancorp(USB), with Buffett selling 4.7 million shares, and ConocoPhillips(COP), which also saw a sale of 4.7 million shares. As for the buying activity, Wells Fargo(WFC) continues to be Buffett’s “go to” stock, with Berkshire picking up another 11.5 million shares of the bank’s common stock, for what we estimate was a purchase price of about $ 390 million, during the third quarter.
Since the start of the second quarter of last year, Buffett has bought 79.9 million additional shares of Wells Fargo, a more than 20% increase in the stake over that time frame. Add that to the 52.4 million shares that Berkshire bought between the fourth quarter of 2008 and the first quarter of 2011, and Buffett has increased the insurer’s stake in Wells Fargo by more than 45% since the end of the fourth quarter of 2008.
About the only other transactions that we can attribute to Buffett in the top 10 holdings was the purchase of 870,000 additional shares of International Business Machines(IBM), bringing Berkshire’s total stake in the technology giant to 67.5 million shares (equivalent to 18.6% of the insurer’s reported stock holdings at the end of the third quarter of 2012).
Third-Quarter Purchases Made by Berkshire’s Managers
As for the non-Buffett purchases made during the third quarter, we saw Berkshire not only pick up additional shares of General Motors(GM), National Oilwell Varco(NOV), DaVita HealthCare Partners(DVA), DirecTV, Viacom(VIAB), and Bank of New York Mellon(BK), but also make new-money purchases of Deere(DE), Precision Castparts(PCP), Wabco Holdings (WBC), and Media General (MEG). We continue to attribute holdings in DirecTV, DaVita, and Viacom to Ted Weschler, given that these were top five holdings at PeninsulaCapital Advisors prior to his joining Berkshire late last year. It is also interesting to note that Weschler has more than $ 1 billion invested in both DirecTV (at $ 1.5 billion or 2.1% of Berkshire’s total equity portfolio) and DaVita (at $ 1.0 billion or 1.4% of the portfolio), which has been a rarity for managers not named Warren Buffett at the firm over the years. ... Continue to read.
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