An in-Depth Look at Berkshire Hathaway's Changing Portfolio
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As is customary as well as mandated, Berkshire Hathaway (NYSE: BRK-A) filed its 13-F disclosure a week after filing its quarterly 10-K. The 13-F is far more interesting as it specifically informs readers of the company's stock sales and purchases during the preceding quarter. I thought it time to take a look at the portfolio of America's foremost value investor.
Much is made in the press about specific sales and purchases. But it is important to note that the portfolio continues to be top heavy with long term Buffett favorites. As of June 30, 2012, the largest holding in the portfolio was Coca-Cola (KO). Its value was $15.6 billion on June 30th, and it occupied some 21% of the overall portfolio. Two other major holdings are of American Express (AXP) and Wells Fargo (NYSE: WFC), two other companies that have been held for decades. The fourth large holding is IBM (IBM), which is a relatively new addition to the portfolio. These four household named, large capitalization companies comprised about 70% of Berkshire Hathaway's common stock portfolio as of June 30, 2012.
The big story of the second quarter was the company's liquidation of large chunks of its consumer non-durable portfolio. Berkshire Hathaway sold off about 2/3 of its stake in struggling health care behemoth Johnson & Johnson (JNJ), about 20% of its stake in Proctor & Gamble (PG), and about 25% of its stake in Kraft (KFT), which is soon to be split into two separate companies. These companies now comprise about 1%, 5%, and 3% respectively, of Berkshire Hathaway's portfolio.
Berkshire did increase its holdings of both Wells Fargo and Bank of New York Mellon in the second quarter. Buffett went out of his way to applaud Wells Fargo's management's focus on its strategy of growing its mortgage business. With competitors such as Bank of America (BAC) no longer showing much interest in growing its mortgage portfolio, Wells Fargo has taken advantage to dominate the market, becoming America's leading mortgage bank by a wide margin, writing over 33% of home mortgages in recent quarters. That focus on mortgages gives me some trouble, for as the bank is loaning out billions of fixed rate notes, it is more likely than not that long term interest rates will climb in the next three to five years. Obviously, that does not trouble Buffett and company, as Berkshire Hathaway now owns 411 million shares, up from 394 million shares at the close of the first quarter.
Berkshire more than tripled its stake in Bank of New York Mellon (NYSE: BK), to a little fewer than 19 million shares. Even at that level, however the holding is just over one half of one percent of the portfolio. I see little at this time to recommend in Bank of New York Mellon, the western world's largest custodial, or trust bank. It is carrying a five year PEG of 0.89, and pays no better than a market average dividend of 2.3%. Earnings this year are trailing last year, and I do not expect much in general from this trust bank in the near term due to a general lack of stock trading activity. If we get past the January 2013 fiscal cliff without setbacks, I would like Bank of New York Mellon's intermediate to long term future more than I do today. I would avoid the stock for the balance of 2012.
Among the large sales made in the second quarter was a complete liquidation of Berkshire Hathaway's stake in Intel (INTC). Berkshire Hathaway had purchased a roughly $200 million block of the chipmaker in late 2011. I like Intel for many reasons, including its dominant market share, and its massive dividend buybacks. It is not like Berkshire Hathaway to dive into and then liquidate a holding within one year as was done with Intel. Do I expect Bank of New York Mellon to advance more in the next twelve months than Intel? No.
Berkshire Hathaway has made a bet on the oil and gas industry. Specifically, it bought modest, by its standards, stakes in Phillips 66 (PSX) and National Oilwell Varco (NYSE: NOV). Phillips is the post-split downstream, refining and marketing operation of the former ConocoPhillips (NYSE: COP). This was really not a surprise, as Berkshire Hathaway had long held a position in the pre-split, ConocoPhillips, and at the close of the second quarter still held a stake in ConocoPhillips. The $183 million investment in National Oilwell is a bet on upstream oil and gas drilling, both offshore and onshore.
I just don't like non-integrated oil and gas companies. Gas prices are on the upswing, to be sure, but the long term use of oil, at least in this country, simply has to be on the decline. The growth of alternative energies such as solar, and wind, and advancements in vehicular batteries all but guarantee lowered use of not just coal, but oil as well. I can make a case for companies with both upstream and downstream exposure, but National Oilwell does not have the scope to be all things the way that Exxon Mobil (XOM) and Chevron (CVX) are. National Oilwell sells at a 5 year PEG of 0.79, which is lower than either of the large domestic integrated companies. But it also only pays a dividend yield of 0.6%, far below the integrated oils' dividend levels. Berkshire Hathaway's purchase of $183 million represents dipping its virtual toe in the water, as it represents just a quarter of one percent of the portfolio.
Viacom (VIA-B) was Berkshire Hathaway’s largest addition, percentage wise, among preexisting holdings in the second quarter, as it more than tripled its holdings to nearly 7 million shares. Still, that represents a modest 0.43% of the portfolio. I like Viacom, a major owner of media properties around the world. This steady performer has experienced average profit growth of 16.4% the past five years, and that is expected to continue unabated the next five years. Its stock price does not reflect this consistent growth, and its PEG is just 0.73. I view Viacom as an excellent choice for many investors.
No one has the long-term stock picking record to match Warren Buffett. And while I for one will not copy all his moves, I will always be interested in his choices to help to give me ideas.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of National Oilwell Varco and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend National Oilwell Varco and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.