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Potential Buy Ideas from Berkshire's Latest 13-F Filing

Berkshire's current portfolio contains more than a few 5-star stocks.

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By Bill Bergman | Senior Stock Analyst

While  Berkshire Hathaway (BRK.A) (BRK.B) made only modest changes to its substantial ($35 billion-plus) equity portfolio during the first quarter, based on data pulled from the firm's latest 13-F filing, we were encouraged to find more than a few 5-star stocks in the company's holdings. In fact, of the 41 securities in Berkshire's equity portfolio at the end of the first quarter, there were 13 stocks that are currently rated 5 stars by our analysts. Berkshire had fairly large positions in five of these securities, each of which accounted for 4% or more of the company's total equity portfolio. In one case, Buffett and Munger were actually adding to a position they had trimmed substantially during the fourth quarter of last year. We've highlighted the top five 5-star holdings in Berkshire's portfolio in the table below and will delve more deeply into each of them as we discuss the moves Buffett and Munger made during the most recent quarter.

Few Shifts in Berkshire's Portfolio
Berkshire didn't add any new stocks to its 13-F portfolio during the first quarter of 2009, nor did it extinguish any holdings. The company did, however, add to its holdings in six securities. Berkshire built a larger stake in two railroad stocks,  Burlington Northern Santa Fe (BNI) and  Union Pacific (UNP), as well as two of its biggest bank holdings,  Wells Fargo (WFC) and  U.S. Bancorp (USB). The largest increase in dollar terms was in Burlington Northern, which was a subject of some conversation at the firm's recent annual meeting as well as in an article we published a few weeks ago. Buffett and Munger have long been leery of railroad investments, but not lately. They have cited how the economics of the railroad business have improved substantially over the years, in part due to the increased attractiveness of rail transport in terms of energy efficiency. Firms like Burlington Northern have been making significant investments in more energy-efficient rail equipment.

As for the two bank stocks, Buffett expressed confidence at the company's recent annual meeting in the operating models of each of these organizations even with the considerable stress and uncertainty facing the banking industry. While neither company was immune to the dissipation in confidence in bank stocks during the first quarter, when various indexes of bank stocks fell as much as 35% to 40%, Berkshire viewed it as a buying opportunity rather than a reason to run for the exit.

 Berkshire's Top-Five 5-Star Holdings

Star
Rating
Fair Value
Uncertainty
Moat
Rating
Current
Price ($)
Price/
Fair Value
% of
Berkshire's
Equity
Portfolio
Procter & Gamble (PG)LowWide53.020.6911.1
Kraft Foods, Inc. (KFT)MediumNarrow24.930.677.5
ConocoPhillips (COP)MediumNarrow44.660.546.8
American Express Company (AXP)HighWide24.150.455.1
Johnson & Johnson (JNJ)LowWide54.990.694.2

Data as of 05-21-09. 

Buffett and Munger Increased Their Stake in J&J
After considerably paring back its holdings in  Johnson & Johnson (JNJ) during the fourth quarter (something we talked about when we looked at Berkshire's last 13-F filing), we were pleased to see the company adding back to its position in the first quarter. We've had Johnson & Johnson rated 5 stars, our highest stock rating, since October 2008. Our analyst Damien Conover likes the company's solidly branded research and distributional leadership position in attractive health-care markets. He notes that Johnson & Johnson controls the top or number-two spot in 70% of its products, and that the company maintains a diverse revenue base, a robust research pipeline, and exceptional cash-flow generation that together create a wide economic moat. Our fair value estimate of $80 per share for Johnson & Johnson is well above the company's current stock price. Our low uncertainty rating on the firm leaves it with a relatively narrow margin of safety and a Consider Buying price of $64 per share, which is also well above the company's current stock price. In our view, Johnson & Johnson is a classic example of a wide-moat company that is currently being undervalued by the market and that deserves a second look from investors.

Berkshire also continues to hold large positions in four other 5-star stocks, which our analysts believe have solid long-term prospects:

 Procter & Gamble (PG)
Our analyst Lauren DeSanto believes that while Procter & Gamble has built its moat with product development and marketing, the firm's strengths go beyond its skills in brand-building. She believes the company's ability to consistently reinvent itself and refocus on improving its capabilities will serve it well in the current environment. Firms with moats as wide as Procter & Gamble's have greater resilience as their structural competitive advantages show through during periods of weakness, and she expects the company to take full advantage of the slowdown in the global economy to not only improve the productivity of its operations but also take share from competitors.

 Kraft Foods (KFT)
Our analyst Erin Swanson feels that Kraft is reporting fairly decent results despite being in the midst of a consumer-led recession, which might indicate that the firm is finally benefiting from its ongoing investments in product innovation and marketing, as well as improvements in its product portfolio. Kraft's powerful brands (each of which generates more than $1 billion in annual sales) include Kraft, Nabisco, Oscar Mayer, Maxwell House, Philadelphia (cream cheese), and Oreo. Although the road ahead could be bumpy, she believes that the firm's investments in its brands and its expansive global network will allow it to continue producing solid cash flows and impressive returns for shareholders.

 

 ConocoPhillips (COP)
As we noted in a recent article, our analyst Allen Good believes that ConocoPhillips has been impacted by the significant drop in commodity prices since last year, which have left the company in a somewhat weaker financial position. While he expects ConocoPhillips' substantial refining business, the second-largest in the United States, to experience continued weakness as refining margins remain under pressure, he notes that the firm has significant ownership in pipeline and other transportation assets that should provide some steady income in this period of commodity price volatility. That said, ConocoPhillips' midstream operations generate around $500 million in net income out of a total $14 billion for the firm, so its near-term fortunes are still heavily tied to its E&P and refining business.

 American Express (AXP)
Our analyst Michael Kon feels that American Express operates the most successful closed-loop credit card network in the United States and many other profitable card businesses around the world. Although the American Express card isn't yet as widely accepted as  Visa (V) or  MasterCard (MA), the firm has evolved from a niche player into a global payment giant. He thinks American Express is prepared to handle both the liquidity crisis that has hit financial firms and the slowdown in the global economy. Although growth is likely to sag and loan losses are likely to mount in the near term as a result of the consumer-led recession and some underwriting mistakes during the real estate boom, he believes that American Express' long-term prospects remain attractive.

Berkshire Trims Two Major Stakes
Among sales, there were two interesting developments. The largest cutback in relative terms was in  CarMax (KMX), where Berkshire pared nearly one third of its stake in the company amid a significant rally in the shares during the first quarter. In dollar terms, the largest cutback came in Berkshire's holdings of ConocoPhillips, which was one of the company's largest holdings at year-end, and a significant contributor to the decline in the value of the overall portfolio in 2008 and early 2009. While Berkshire sold about 10% of its shares during the first quarter, ConocoPhillips was still the sixth-largest position in the equity portfolio at the end of the quarter. Berkshire had boosted its holdings of ConocoPhillips significantly in the spring and summer of 2008, just before oil prices fell by about two thirds in the latter half of the year, with ConocoPhillips' stock price getting cut in half in the process. Ouch. This goes to show that nobody's perfect, including Berkshire Hathaway. Even with the sale, this 5-star-rated oil and natural gas producer still made up close to 7% of Berkshire's equity portfolio at the end of the first quarter.

Other 5-Star Stocks in Berkshire's Portfolio
The other 5-star stocks in the portfolio (which we've listed in the table below), comprise a mixture of wide- and narrow-moat firms operating everything from railroads to health-care facilities. While the position sizes are relatively small within Berkshire's portfolio, we think they still warrant a closer look. For more information about our analysts' opinions on these eight 5-star stocks, as well as the 2,000 other companies we cover, please see our full list of Stock Analyst Reports on Morningstar.com.

 Other 5-Star Stocks in Berkshire's Portfolio

Star
Rating
Fair Value
Uncertainty
Moat
Rating
Current
Price ($)
Price/
Fair Value
% of
Berkshire's
Equity
Portfolio
Wesco Financial Corp. (WSC)MediumNarrow297.500.613.9
WellPoint, Inc. (WLP)MediumNarrow45.390.480.4
Comcast Corporation (CMCSA)MediumWide14.450.580.4
Lowe's Companies Inc. (LOW)MediumWide19.300.540.3
Sanofi-Aventis (SNY)MediumWide30.590.670.3
UnitedHealth Group, Inc. (UNH)MediumNarrow26.920.560.2
Norfolk Southern Corp. (NSC)MediumNarrow34.430.600.2
GlaxoSmithKline PLC (GSK)MediumWide33.310.680.1
Data as of 05-21-09.

Disclosure: Bill Bergman doesn't own shares in any of the companies mentioned above.

The Morningstar Ultimate Stock-Pickers Team does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.