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The Berkshire Hathaway Portfolio

Boost your returns by following the Oracle of Omaha's company.

Justin Fuller, 01/16/2007

Morningstar's 100 stock analysts cover 1,800 companies. Their full analyst reports are available through Morningstar Principia Stocks Advanced and Morningstar Advisor Workstation Office Edition.

I regularly review the stock holdings of Berkshire Hathaway BRK.B, the investment conglomerate run by Warren Buffett, one of the all-time great investors. It should also be noted that some of Berkshire's stocks are selected by Lou Simpson, who has run the equity portfolio at Berkshire's wholly owned auto insurer, Geico, for the past 25 years. As Buffett laid out in Berkshire's 2004 annual report, Simpson's investment record is impressive in its own right, having outpaced the S&P 500 by an average of almost 7% per year. As such, I'll gladly learn from either.

Each quarter, Berkshire files form 13-F, which discloses its consolidated equity investments, with the SEC. Berkshire's latest 13-F disclosed 39 stock positions as of Sept. 30. Berkshire also owns some foreign investments, but the firm doesn't have to disclose these because it owns the local shares, not the U.S. ADRs. As such, I've excluded them from this analysis.

Recent Commentary
At Berkshire Hathaway's annual meeting in May, Buffett said that if he were starting his investment partnership over again, he would invest in securities around the world and focus on smaller companies. To illustrate this, he used the experience of his relatively recent investments in Korea, stating that since companies with strong balance sheets were trading at a meager 3 times earnings, he would have been almost 100% invested in Korea. What's more, he said he wouldn't expect all of his small investments to pay off, but would only need a few to pay off very big. While this commentary is very instructive for most of us, you won't necessarily see Berkshire making these types of small-company investments anymore.

The reason for this is that Berkshire is so big now--it has more than $40 billion in cash on its balance sheet--that it is difficult for the firm to invest in stocks with relatively small market capitalizations. In addition, given their small size, these investments would have a negligible impact on Berkshire's results. As such, Berkshire tends to make investments in larger companies, where it can deploy enough cash to move the needle on its own intrinsic value. And Buffett has a fairly conservative outlook on Berkshire's current stock investments, stating in last year's annual report that he believed the share prices of Berkshire's stock portfolio might only double in about 10 years' time.

Now you're probably thinking: Great, if Buffett himself thinks Berkshire's equity investments will only be slower growers, why should I be interested in them? Well, in my view, the ability to buy a fractional ownership interest in some great businesses at attractive prices with limited downside is still a very good proposition, especially when compared to the average investor's current opportunities. In fact, investors who might be able to safely double their portfolios in 10 years' time--a 7.17% potential compound annual return--will still probably beat the returns of the majority of investors and quite possibly the S&P 500. While the S&P 500 has appreciated in the last few years, it is still now only within shouting distance of the level it reached during 1999-2000, and even worse, my colleagues at Morningstar collectively believe that the S&P 500 is modestly overvalued entering 2007.

New Investments and Additions
As of Sept. 30--Berkshire's most recent filings with the SEC--the conglomerate didn't add any new positions compared to its June 30 report, but it did receive shares in Western Union WU which was spun off from longtime holding First Data FDC. Berkshire also increased its stake in five of its existing holdings: Iron Mountain IRM, Lowe's LOW, Nike NKE, and USG USG.

I think the most intriguing of these is Western Union, which dominates the lucrative money transfer market. My colleague Mark Weber has long held Western Union to be the most undervalued part of First Data's overall business, and he believes that the spin-off now allows potential investors to participate in the economics of this outstanding franchise at a very attractive price. In fact, Weber estimates Western Union's fair value to be $32 per share, about a 45% upside to the firm's current share price.

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