How to profit by combining Morningstar's and Berkshire's best investment ideas.
In addition to its just-released shareholder letter, Berkshire Hathaway
Just because Berkshire owns a stock doesn't necessarily mean that the price is still attractive enough for you to consider purchasing it. In fact, Buffett said in last year's Berkshire Hathaway annual shareholders' letter, "Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly profitable businesses, they are not selling at anything like bargain prices." He went on to say, "The likelihood is that their per-share earnings, in aggregate, will grow 6-8% per year over the decade and that their stock prices will more or less match that growth."
While it is certainly possible that Buffett is being somewhat conservative in his assessment, and that for many investors 6% to 8% annual growth over 10 years would be welcome, I'd like to think that investors can do better by cherry-picking from Berkshire's portfolio, rather than simply replicating it. Before taking a look at what we at Morningstar think are the most compelling ideas from Berkshire's portfolio, I'll recap the conglomerate's most recent transactions.
In its recent filing, Berkshire disclosed three new positions: Ingersoll-Rand Company
Our analysts believe that each of these stocks (with the exception of USG, which at this time we don't rate) is fairly valued, as each holds a 3-star rating. This means that our analysts believe the stock price will only grow by the company's cost of capital over the next year. Even though Morningstar doesn't rate USG at this juncture, I remain cautiously optimistic on this investment, given that the company is well positioned as the low-cost provider in the wallboard manufacturing industry after having emerged from bankruptcy in mid-2006.
Eliminations and Reductions
Berkshire also sold some stocks last quarter, eliminating its position in Sealed Air
Berkshire's position in Outback Steakhouse