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By Jeremy Glaser and Greggory Warren, CFA | 04-27-2012 02:00 PM

Berkshire's Best Opportunities May Be Internal

After the market runup, Berkshire's best place to deploy cash might be making investments in its capital-intensive businesses like Burlington Northern, says Morningstar's Gregg Warren.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. As we get ready for the Berkshire Hathaway Annual Meeting on Saturday, May 5, I'm here with Gregg Warren. He is the senior equity analyst, and we are going to take a look at whether Berkshire's investment opportunity set is shrinking.

Gregg, thanks for joining me.

Gregg Warren: Thank you for having me.

Glaser: So, let's talk a little bit about some of the investments that Berkshire has made in recent history. Particularly during the financial downturn, the firm made a lot of opportunistic investments. Can you talk a little bit about what those investments were and how they played out for Berkshire?

Warren: Well, if we're thinking about the most recent downturn, which is the back half of last year, Berkshire came into the third quarter with about $48 billion in cash. The firm really only had commitments for about $9 billion of that going to the Lubrizol acquisition. So, Berkshire had plenty of cash to work with when the markets tanked.

As you would assume, Warren Buffett and his lieutenants, Todd Combs and Ted Weschler, who had joined in the third quarter, as well, were actively out there looking at investments. One of the more interesting ones was the Bank of America purchase, where Buffett picked up 50,000 shares, 6% preferreds, and Bank of America for $5 billion.

As part of the transaction, he also got warrants to purchase 700 million shares of common stock at $7.14 a share. And if you just look at where the stock is trading right now, a little bit above $8, Buffett has already made $700 million on that investment alone.

One of the other bigger deals during the period was International Business Machines. Buffett had been building up a stake through the course of year but didn't really acknowledge it until after the third quarter. But he put about $11 billion to work in IBM. It's now Berkshire's second-largest stockholding overall and sort of speaks volumes to Buffett's ability to dip into the cash on hand and buy up securities.

Glaser: Certainly, we've seen that Buffett really has made a name for himself by buying on these dips and putting money to work when there's fear in the market, but how about his new lieutenants? Were they also able to take advantage of this downturn?

Warren: I think one of the more interesting deals that we saw during the period was Berkshire buying up about $1 billion worth of DirecTV. It's a fairly large stake for either Todd Combs or Ted Weschler to be building up. Based on what we've seen in the past with Lou Simpson or someone Buffett considers to have ideas that are not necessarily his--Buffett tends to do the billion-dollar-plus sort of transactions--I think what this deal does sort of signal is the confidence that he has on these two guys if he is willing to let them build up that big of a stake overall.

Glaser: So, it sounds like everyone at Berkshire is really out there putting money to work. But because the market has run up pretty considerably, there's a lot less opportunity from evaluation standpoint. Are they, basically, just having to sit on their hands? Is there anything Berkshire can do in a market like this?

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