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Published: November 18, 2009
The Oracle has spoken.
Fresh on the heels of his recent $44 billion deal to buy the
railroad Burlington Northern Santa Fe, Warren Buffett's latest
filing with the Securities and Exchange Commission Monday night
shows his company, Berkshire Hathaway (NYSE: BRK-B), has
acquired new stakes in Exxon Mobil (NYSE: XOM), food
giant Nestle (Pink: NSRGF) and trash hauler Republic
Services (NYSE: RSG).
The filing also shows Buffett added to his holdings of
Wal-Mart (NYSE: WMT) and Wells Fargo (NYSE: WFC).
Buffett's stake in Exxon, about 1.28 million shares, is worth
about $95 million, while the Nestle shares are valued at
slightly more than $160 million. That's pocket change to
Berkshire. The Wells stake, however, is significantly larger:
313.4 million shares worth $8.9 billion, or about 16% of
Berkshire's $56.5 billion cache of equities.
According to the third-quarter filing, Buffett reduced his
holdings of the utility NPG Energy (NYSE: NPG), petroleum
giant Conoco Phillips (NYSE: COP) -- a pick he
characterized earlier this year as "a major mistake" -- and
health insurer WellPoint (NYSE: WLP).
The SEC filing, which Buffett makes quarterly to detail his
holdings, showed no trace of Eaton Corp. (NYSE: ETN), of
which Berkshire had held two million shares last quarter.
Buffett also cut his stake in SunTrust Bank (NYSE: STI),
and previous filings indicated that Buffett has been easing away
from Moody's (NYSE: MCO), a portfolio favorite for its
wide economic moat that has nevertheless come under widespread
scrutiny for the role its ratings played in the financial
crisis.
That's the Buffett news. Here are three points the market is
missing:
1. The Connections
Buffett invests with, works with and listens to his old friends.
Walter Scott, for example, is a hometown neighbor who now sits
on Berkshire's board and helps run its utility business. (It was
Scott who in 1986 told Buffett it was OK to buy a private jet.)
Charlie Munger, whom Buffett met through another friend at the
Omaha Club in 1959, has become his "alter ego" and has been
behind some of Berkshire's notable deals, including See's Candy
and BYD. Many of Berkshire's deals can be traced to information
from a relatively small circle of smart, like-minded,
plainspoken Midwesterners.
With one notable exception: Bill Gates.
Gates and Buffett are close friends who share a devotion to
bridge. Gates also sits on the Berkshire board, and Buffett has
pledged his fortune to the Bill & Melinda Gates Foundation.
This is why Buffett's recent addition of Republic Services
wasn't so surprising. Not only does the Gates Foundation own
this stock, but Gates himself is a major shareholder. Cascade
Investments, Gates' personal hedge fund, owns nearly 20% of the
$10 billion trash company.
If you're wondering what other companies Gates owns that he
might be talking to Buffett about while they play cards, check
out “The
Secrets of Bill Gates' Portfolio.”
Bottom line: Don't underestimate the value of Buffett's
friendships.
2. What Really Matters in Oil
Buffett made a foray into the oil patch with ConocoPhillips
about a year ago when oil was near its highs. Buffett later came
to regret the purchase, which now will offer only "a tax
benefit," a nice way of saying "a huge capital loss from buying
high and selling low."
Now Buffett seems eager to redeem himself. This time he's picked
a winner.
Exxon Mobil knows that the secret in the oil business isn't
price, it's cost. Exxon's grasp of this is one of the things
that has always made this company attractive.
If an oil company can't strictly manage the expenses of
extracting energy, then it doesn't matter what crude or natural
gas is selling for -- the company will always spend to the
break-even point. This may lead to productive wells but not
necessarily profitable ones. The wildcatting days of the "awl
bidness," when the geologist picked a spot, the tool pusher dug
the well and the investors waited for returns are over. Today,
the break-even point is static, not fluid. Petroleum companies
aren't about managing risk, they're about successful project
execution.
Such excellent, disciplined management is why ExxonMobil is a
clear Buffett pick. He loves capable managers that can operate
cheaply and efficiently. That's certainly Exxon: The company
replaces its crude reserves far more cheaply than its rivals can
manage. Exxon also completes its projects closer to budget and
to deadline than its competitors. In 2008, the company earned
$24.67 per oil-equivalent barrel, handily outpacing its peers.
And the stock is cheap. The petroleum-industry leader can be had
for about 17.6 times earnings, more than some of its peers but
certainly not expensive. Its earnings multiple puts it at a -20%
discount to the S&P -- but Exxon has immensely stronger
financial wherewithal, a world-beating industry position and
obvious managerial prowess. Management is key, Buffett always
says, noting that it's the one thing that Berkshire can't
supply.
Bottom line: Buffett always likes industry leaders with proven
management at a fair price. (The only thing he likes more is to
redeem the mistakes he's made.) Exxon Mobil is a bet that the
low-cost operator always wins in the end.
3. This Selling Is Reactionary, Not Proactive
Outside of the Gates-related acquisition of Republic Services
shares, which I expect Buffett to continue buying, and the Exxon
stake, Buffett's moves are reactionary rather than pro-active.
They show a chairman trying to protect shareholders from the
worst words Buffett ever had to utter: "Our decrease in net
worth during 2008 was $11.5 billion," Buffett said in starting
off off his annual letter shareholders last year."
Buffett never wants to have a year like 2008 again. He's
compounded the net asset value of Berkshire at a +20.2% rate
during the past 44 years, a record that will earn him
immortality and one that he doesn't want to see tarnished.
So he's getting out of cyclical industrial plays like Eaton and
buying companies that sell oil, food and cheap goods. He's
buying more of the bank -- Wells Fargo -- that is widely
recognized as the industry's best risk manager. He's getting out
of the nation's largest health insurer to avert political risk
and putting the money to work picking up trash.
Warren Buffett, despite all of his platitudes about an "all-in
wager on the future of the American economy," is clearly
recession-proofing Berkshire's portfolio by investing in
essential noncyclical businesses.
These quarterly moves are reactionary, and that's no way to run
a railroad, if you'll pardon the expression. If you must follow
Buffett -- by some other venue than owning Berkshire, a stock
everyone should own -- then follow him by watching his big deals
-- the proactive moves -- not necessarily the purchase of $160
million worth of Nestle.
Bottom line: Never look to Buffett's quarterly filing for
portfolio guidance. These actions are no way for an individual
investor to build a portfolio, they are simply the way the
world's most successful investor manages his.
Andy Obermueller
Editor
Government-Driven Investing |
