Warren Buffett and Berkshire Hathaway are going down in history, so investors should keep an eye on their investment activity as long as possible and drill into the activity as much as possible. Obviously given Berkshire’s large size even large moves that are disclosed in 13F filings may not be very big in relative terms compared to the entire portfolio, but we have gone through Berkshire’s most recent 13F and compared it with historical ones. Here are a few trends which we think are worth paying attention to:
Reducing some consumer staples. Some of Berkshire’s sales of stock were interestingly large. The company’s stake in Procter & Gamble fell from 73 million shares to 60 million, holdings of Kraft fell from 78 million to 59 million, and Buffett nearly closed the Johnson & Johnson (NYSE:JNJ) position, reducing it by about 70% to 9 million shares. Now, these moves aren’t necessary an expression of bearishness on the consumer or the U.S. economy: Johnson & Johnson has the highest beta of the three stocks at only 0.5. There is an interpretation that these just aren’t good value stocks, with trailing P/E ratios above 20 for Kraft and Procter & Gamble (NYSE:PG) and at 18 for Johnson & Johnson, and so Buffett is getting out on value grounds. However, we actually read these stock sales as part of a fairly bullish move: Berkshire pulling cash out of these more defensive companies in order to make new investments or increase holdings in riskier areas. Interestingly, another billionaire Bill Ackman initiated a huge activist position in Procter & Gamble around the same time Buffett was selling.
Financials, just not megabanks. Recently we’ve been touching on the theme that banks such as Citigroup, Bank of America, and JPMorgan Chase are undervalued compared to Buffett’s favorite Wells Fargo & Company (NYSE:WFC). Well, Buffett is still standing by Wells Fargo: Berkshire actually increased its position by about 17 million shares to 411 million. Wells Fargo & Company (NYSE:WFC) isn’t a particularly bad buy with a trailing P/E ratio of 11 and a 2.6% dividend yield, and its reputation is more intact than its more eastern-based peers, but on a value basis we simply think that diversifying an investment in the other three banks is a better idea. Buffett slightly reduced Berkshire’s holdings of US Bancorp but added substantially to the company’s position in wealth management and financial services provider Bank of New York Mellon (NYSE:BK). Bank of New York Mellon currently trades at 12 times trailing earnings and 9 times sell-side earnings estimates for 2013. Note that some of the money which Berkshire pulled out of the consumer staples stocks likely helped fund increases in positions at these banks, which by their nature are more tied in to the U.S. economy. Also on the financial front, the position in American Express (NYSE:AXP) remained unchanged from the end of March at 152 million shares.
DirecTV. The digital television provider was the only new name in the top ten holdings of Berkshire Hathaway according to the 13F, rising to replace Johnson & Johnson as the company added 5 million shares to reach 28 million. DirecTV (NASDAQ:DTV) has a solid brand name and delivered steady growth in its most recent quarter compared to the same period in the previous year. It trades at 13 times trailing earnings and 10 times forward earnings estimates, so it can be classified as a value stock. Like the financials, it is more tied to the broader economy than the defensive stocks (such as Johnson & Johnson) that Berkshire sold out of.
Despite the reduction in Berkshire’s position in some consumer stocks, overall we see an investment company moving money into more aggressive industries and sectors (we haven’t yet mentioned a slight increase in its IBM position) and therefore our primary takeaway is that Berkshire was bullish on the U.S. in the second quarter, flying in the face of much investor skepticism about a growth slowdown or even a double dip recession. And yes, Buffett held on to the 200 million shares of his precious Coca-Cola (NYSE:KO) from last quarter, a number that’s been constant for over a year now.