Buffett Takes His First Plunge Into Tech
Despite a previously stated aversion to technology companies, IBM's wide-moat operation is the type of business Buffett prefers. Plus get our take on other Berkshire portfolio changes.
Despite a previously stated aversion to technology companies, IBM's wide-moat operation is the type of business Buffett prefers. Plus get our take on other Berkshire portfolio changes.
Berkshire Hathaway (BRK.A) (BRK.B) released its 13F filing today, which discloses the domestic equity securities it holds in its investment portfolio and, as previously disclosed in a CNBC interview, the headline-grabbing news included the company's purchase of 64 million shares of IBM (IBM), equivalent to approximately $10.7 billion or 5.5% of the company, year-to-date.
Warren Buffett, Berkshire's chairman and CEO, has previously stated his aversion to technology companies, mainly because he felt that it was too difficult to predict which technology firms would actually prosper in the long run, and his plunge into the technology sector is a surprising turn of events. While some have argued that Buffett was paying a premium for IBM, our own calculations show him to be up at least 10% on his purchases (based on the cost basis figure that he revealed for his stake in the technology giant). This wouldn't be the first time that Buffett has shown a willingness to change course in order to put money to work, with the 2009 purchase of Burlington Northern Santa Fe being the best example. And, with IBM's wide economic moat, it is the type of business that Buffett prefers.
In addition to the IBM purchase, there were material changes to the equity portfolio, including the purchase of stakes in a number of companies that Berkshire had never held previously. Berkshire added stakes of just less than $200 million in each of CVS Caremark (CVS), Directv , General Dynamics (GD), Intel (INTC) and Visa (V). In his interview Monday morning, Buffett alluded to the fact that Berkshire would disclose purchases from Todd Combs in this quarter's release, and that those purchases would generally be around $200 million. Therefore, we believe it is very likely that these new additions represented Combs' purchases, and that the larger transactions or tweaks made to the legacy portfolio were the work of Buffett. Additionally, we believe the addition to Dollar General (DG) is also a decision made by Combs rather than Buffett, as the cumulative position now totals slightly less than the $200 million level. Ted Weschler, Berkshire's other hire as an investment portfolio manager, has not yet had the opportunity to make his mark on the portfolio, but we would expect his purchases to be of a similar size to Combs' and will likely begin to appear in future quarters.
We believe Buffett is likely responsible for most the remaining moves in the investment portfolio, which are largely tweaks to existing positions. The company sold a little more than 5 million shares of Johnson & Johnson (JNJ) (equivalent to approximately $325 million based on Monday's closing price) and approximately 10 million shares of Kraft (KFT) ($350 million as of today's close). Without commentary from Buffett, it is difficult to determine on a case-by-case basis why the company sells or trims positions in certain securities. In the case of Kraft, however, Buffett has expressed some dissatisfaction with the company's acquisition of Cadbury and has trimmed his stake in the past.
The 13F showed an increased stake in Torchmark (TMK) and Verisk (VRSK). Berkshire has held a very small position in Torchmark for a while, and the addition is almost immaterial to the aggregate portfolio composition. While the investment technically predates the hiring of Todd Combs, the current size of the investment (approximately $150 million) is around the size of the average position holding that he will make, which indicates this may be a move by either Buffett or Combs. The addition to Verisk is not a purchase decision but rather shows up as a technicality surrounding the vesting of shares Berkshire previously held from the company's IPO. As we noted last quarter, half of Berkshire's holdings of Verisk's Class B common stock automatically converted to class A stock in early April, and the doubling of the investment shown in the 13F during this quarter represents the conversion of the second half of shares.
Finally, the company added materially to its holdings in Wells Fargo (WFC), purchasing more than 9 million shares in the quarter, equivalent to nearly $225 million as of today's market close. Buffett has added to his position in Wells a number of times in the past and continues to comment that he likes the bank's business model and valuation. As the stock continues to tread water or decline, the price looks more favorable on a relative basis, and Buffett believes the investment will work out over the long term.
Stay tuned, as we intend to publish a much deeper look at Berkshire's holdings as part of our Ultimate Stock-Pickers content.
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