Our Picks from Berkshire's Portfolio -- Part 2

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5-Star Stocks
Presently seven of Berkshire's 45 stocks are rated 5 stars by Morningstar analysts. The aforementioned Johnson & Johnson, Wal-Mart, and Western Union are all rated 5 stars, as are  Wesco Financial ,  US Bancorp (USB),  United Parcel Service (UPS), and  Procter & Gamble (PG). This means that our analysts presently think each of these stocks has a large enough margin of safety to our fair value estimate to potentially generate pleasing returns for owners over time. Here are some of our analyst takes on each of these companies

My colleague Heather Brilliant recently said about Johnson & Johnson: "J&J is unique among pharmaceutical firms in that more than half of its revenue comes from other areas, namely medical devices and consumer health-care products. We expect these businesses will grow faster than the firm's pharmaceutical division in the coming years, and will therefore increase as a proportion of J&J's revenues and profits. Businesses, such as orthopedic device maker DePuy and minimally invasive surgery division Ethicon Endo-Surgery, continue to develop innovative products and lead their respective markets."

Morningstar analyst Joseph Beaulieu recently wrote in his analysis of Wal-Mart, "At its most successful, Wal-Mart has used its leverage over suppliers and its operational savvy to drive strong returns on invested capital, so we're glad to see signs that it is returning to those core strategies. In recent quarters, despite the rising percentage of groceries in the company's revenue mix, total gross margins have continued to increase as a result of higher initial markups and fewer markdowns on general merchandise. Inventories are growing much more slowly than revenue, and this trend should continue to boost gross margins while reducing working capital requirements--two things that help drive returns on investment."

My colleague Brett Horn recently commented on his wide-moat rating on Western Union: "Western Union has a number of sustainable advantages that should allow it to outperform its competitors. First, the money transfer business is scalable, since the incremental costs of processing additional transactions are minimal. While Western Union has a dominant industry position, processing about 5 times the transactions of its closest competitor, MoneyGram MGI, it still has only 17% market share. This leaves the company plenty of room to grow as the industry consolidates, and it is using its cost advantages to price out smaller competitors and grab market share. Second, the company's unrivaled network of more than 300,000 agents allows it to benefit from the network effect, as each additional agent makes using Western Union that much more convenient for customers. Finally, the Western Union brand is the most recognized in the industry, which is important when consumers entrust the company with their hard-earned cash."

I recently wrote about holding company Wesco Financial, which is 80%-owned by Berkshire Hathaway: "Wesco's success in reinsurance is due to a couple of moat-widening advantages. Wesco benefits from the financial strength of Berkshire, which yields the firm a AAA credit rating. This financial strength is a powerful advantage in the competitive market for large, long-duration risks, as it helps Wesco attract the "first look" at many profitable contracts. Wesco also benefits from the specialist underwriting skill of Berkshire unit National Indemnity, the industry's most profitable catastrophe reinsurer. In fact, in five out of the last six years, which includes two years of heavy hurricane losses, Wesco's combined ratio has been under 100%."

My colleague Ryan Lentell recently said of US Bancorp: "We admire management's goal of returning at least 80% of earnings to shareholders annually, achieving 10% long-term earnings per share growth, and maintaining returns on equity above 20%. We think these significant self-imposed hurdles are shareholder-friendly, and achieving them should create shareholder value. In our opinion, the firm's efficient and diversified franchise is the key to its consistently strong financial results. Today, almost 50% of US Bancorp's revenue is noninterest-related, reducing its interest rate sensitivity."

Our Analyst Report on UPS states: "Internationally, UPS' growth opportunities are more abundant and profitable. The company has invested heavily in Europe and Asia and expects to increase its presence in both areas. It also hopes to increase its share of packages crossing international borders, as UPS' yield per package on those shipments is almost double that of any of its other services. Unlike its domestic strategy of growing at the market rate, its international goal is to grow faster than the global market."

Analyst Lauren DeSanto recently raised her P&G fair value estimate, writing: "We've played defense on Procter & Gamble as it has worked through integrating Gillette over the past 18 months, but with the two companies almost completely merged we are raising our fair value estimate for the shares considerably. ... In addition, we've reviewed the firm's third-quarter results in more detail and while they didn't knock our socks off, we think the market reaction has been overblown and the shares are looking cheap. In our opinion, this is a rare occasion to invest in one of the widest-moat consumer products company around with a decent margin of safety."

You might have noticed that I have also taken a position in both Johnson & Johnson and Wal-Mart in The Morningstar Ultimate Stock-Picker's portfolio, as not only Morningstar and Berkshire, but several other investment managers with attractive long-term track records believe the shares to be favorably valued. As I compile my new watch list based on this group of managers' first-quarter holdings data, I'll be watching closely to see if the other 5-star stocks listed above are held by anyone else in addition to Berkshire.

Finally, those of you who can't purchase all of these stocks or replicate my holdings in The Ultimate Stock-Picker's Portfolio should note that I still believe Berkshire's shares are attractively priced at this juncture. A single investment in Berkshire will give you exposure to all seven of these 5-star stocks, as well as to the conglomerate's substantial--and potentially more valuable--private holdings. Stay tuned for more Berkshire and other manager holdings news, and please don't forget to subscribe to my free e-mail alerts to make sure you are first to receive my new analyses and portfolio updates.

The Berkshire Hathaway Portfolio*
Company	% of Holdings	Moat Rating**	Morningstar Rating**
Coca-Cola (KO)	15.61	Wide
American Express (AXP)	13.90	Wide
Wells Fargo (WFC)	13.00	Wide
Procter & Gamble (PG)	10.34	Wide
Moody's (MCO)	4.84	Wide
Johnson & Johnson (JNJ)	4.77	Wide
Burlington Northern	4.53	None
Wesco Financial	4.27	Narrow
Tesco (PLC)	2.96	N/R	N/R
Anheuser-Busch (BUD)	2.92	Wide
Washington Post (WPO)	2.15	Wide
ConocoPhillips (COP)	1.99	Narrow
Posco (PKX)	1.88	Narrow
Union Pacific (UNP)	1.74	None
White Mountains Ins. (WTM)	1.59	None
Wal-Mart (WMT)	1.52	Wide
US Bancorp (USB)	1.33	Wide
USG Corp	1.30	Narrow
M&T Bank (MTB)	1.26	Narrow
American Standard Co.	0.95	Narrow
Nike (NKE)	0.69	Narrow
Norfolk Southern (NSC)	0.52	None
Tyco	0.51	Narrow
Comcast (CMCSA)/	0.50	Wide
Costco (COST)	0.46	Narrow
General Electric (GE)	0.45	Wide
First Data	0.44	Wide
SunTrust Banks	0.43	Narrow
Ameriprise (AMP)	0.40	None
Iron Mountain (IRM)	0.38	Wide
Lowes Cos. (LOW)	0.36	Wide
Western Union (WU)	0.35	Wide
Gannett (GCI)	0.32	Narrow
Torckmark (TMK)	0.30	Narrow
Home Depot (HD)	0.25	Wide
United Parcel Service (UPS)	0.16	Wide
WellPoint (WLP)	0.13	Narrow
PetroChina	0.13	Narrow
ServiceMaster	0.10	Narrow
United Health Group (UNH)	0.09	Narrow
Sanofi-Aventis (SNY)	0.06	Wide
Ingersoll-Rand (IR)	0.04	None
H&R Block (HRB)	0.04	Wide
Comdisco Holdings (CMCO)	0.02	N/R	N/R
Pier 1 Imports	0.02	None
* as of 03-31-07 ** as of 05-18-07