What Stocks Are in Buffett’s Annual Letter? – Wells Fargo & Co (WFC), The Procter & Gamble Company (PG)

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Okay, Okay! Another ‘Warren Buffett buys this, Buffett buys that’ article. I know what you are thinking and yes, my eyes glaze over with boredom too when I come across a piece about Buffett. However bear with me; I’m going to cut to the chase and outline and discuss some of his major common stock holdings as discussed in Berkshire Hathaway Inc. (NYSE: BRK.B)’s recent annual letter. He is well worth picking ideas from because he is a fantastic investor, and unlike the proselytizing clowns you see on television he has an easily identifiable track record.

Wells Fargo & Co (NYSE:WFC)Buffett’s Key Holdings

This is the first time I have looked at this in any depth and was surprised to find a few stocks in common. Tomes of verbiage have been created on the subject of his investing so I can be allowed a few words too. He is definitely a value investor in the sense of finding intrinsic value and being willing to wait for the market to see it so he can realize his gains. As I never tire of pointing out, all thematic, evaluation based or even technical and mechanical based strategies will produce unintentional style or sector biases. In fact, you can see a classic example of this in 1999 where he massively underperforms (as the market piles into technology but he doesn’t) and then he outperforms for the three years when the tech bubble bursts. He then underperforms as the cyclical stuff makes a comeback in 03-04.

With that said, here are Berkshire Hathaway’s holdings (as listed in the letter) that had a market value of more than $1 billion.

These stocks make up 87% of the total common stock holdings. In other words, they will make a significant difference to BRK’s performance.

Delving Deeper

Buffett previously made the case for a recovery in the US housing market, and I think this is a large part of his case for holding Wells Fargo & Co (NYSE:WFC). The bank is making aggressive inroads into the US mortgage market and is set to be a key beneficiary of a recovery in housing and credit quality improvements. One issue that is challenging the banks in 2013 is that net interest margin (NIM) will be pressured as the loan book matures (containing older loans at a higher rate of interest) and as deposits grow the NIM will be pressured on both sides. Indeed, Wells Fargo & Co (NYSE:WFC) did recently report declining NIM. However, as outlined here the key point is that the economy is improving so all those extra deposits are likely to be used to expand Wells Fargo & Co (NYSE:WFC)’s loan book, and credit quality improves with a better economy. Similarly American Express Company (NYSE: AXP) is a play on the US credit cycle.

International Business Machines Corp. (NYSE: IBM) is a stock I bought recently, and I confess that when I bought it I wasn’t convinced I was buying a technology company! There is a write-up of the stock linked here, and what investors should note is that this isn’t an IT stock in the sense that it has a proprietary or disruptive technology that is fighting to create or punctuate a market. On the contrary, IBM is more of a ‘blocking and tackling’ play. The company is cutting costs and focusing on shifting to higher margin work, so the next time someone yaps about its low single digit revenue growth then point out the margin expansion, free cash flow and double digit EPS growth. In a sense it is a classic Buffett play because it is releasing the intrinsic value in its business via these measures.

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