Tracking 10 Years Of Berkshire Hathaway's Investment Portfolio (Part 2)

This article is Part 2 of a three-part series. The first part can be accessed here. Berkshire Hathaway’s (BRK.A) habit of nibbling bite-sized stakes only to dispose them off later was mentioned in passing in our previous article. This approach very often trips up investors who attempt to front run future Warren Buffet purchases – by the time they get long on the stocks concerned,Buffett has already liquidated the positions. This article examines the finer points of such trades. In the last decade,fifty seven stocks staged a fleeting appearance in Berkshire Hathaway’s investment portfolio.

Below is a list of those stocks classified by sector that no longer figure in the latest 13F report:

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Drilling down on these assets on a sector basis clearly confirms Buffett’s nibbling pattern.

  • Industrials:
    1. Berkshire Hathaway initiated a very small stake in Ingersoll Rand (IR –~0.05%) in 2006 and has maintained its share count in the latest filing,although there were some variations in the interim years.
    2. A related stake was American Standard first purchased in 2003. American Standard,renamed Trane following a break-up,spawned two other entities in February 2007:the vehicle controls division –Wabco Holdings (WBC), and the kitchen and bath division which got sold to Bain Capital Partners. Ingersoll Rand completed a transaction to purchase Trane on June 5,2008. Shortly after these transactions Berkshire Hathaway sold off its tiny stake in WBC and liquidated the Trane position.
    3. The stakes in Great Lakes (~0.6%),Mueller Industries (MI –~0.4%),and Sealed Air (SEE) along with Pfds (~0.6%) that accounted for almost 1.6% of the total portfolio in 2001 were liquidated by 2005.
    4. In the last decade,Berkshire also held very small stakes in Dover Corporation (DOV),Eaton Corporation (ETN), Nalco Holdings (NLC),Service Master,and Tyco International (TYC) which were sent on its way with holding periods of less than three years.

    As the stakes were very small,they are not an indication of Buffett’s bullish or bearish bias. The spreadsheet below summarizes Berkshire’s industrial holdings that were sold out in the last ten years:

    • Consumer Staples and Discretionary:

    Berkshire sold out of fifteen Consumer Staples and Discretionary stocks during the last ten years most of which were sales in the retail sub-sector.

    1. Berkshire held retail stakes in Jones Apparel Group (JNY),La-Z-Boy (LZB),Liz Clairborne (LIZ),Nike (NKE),and Outback Steakhouse as of 12/2001. The significant ones were JNY and NKE at ~1% of portfolio value each. Berkshire sold out of JNY in 2003 after reducing the stake by 90% in 2002,indicating a bearish bias. The stock price varied between a high of $41 and a low of $27 during those two years. The price has gone down gradually since then and has settled at $9.9,~63% below the lowest price Berkshire could have sold it for during those two years. With NKE,Berkshire trimmed his stake to less than half in 2004 before building it back to a lesser degree. The shares were sold in late 2010 following Lou Simpson’s (Warren Buffett’s backup stockpicker) retirement demonstrating Buffett’s lack of faith in NKE. The stakes in LZB,LIZ,and Outback Steakhouse were too small and hence should be considered as such only – they are not an indication of a bullish or bearish bias.
    2. Berkshire held small stakes in Best Buy (BBY),CarMax (KMX),Gap Inc (GPS),Home Depot (HD),Lowes (LOW),and Pier 1 Imports (PIR). The significant ones are the roughly 1% stake in GPS acquired in 2002 and a combined ~1% stake in HD and LOW together built between 2005 and 2007. The Gap stake was sold out gradually between 2004 and 2006 at higher prices. The stakes in the home builders were disposed off between 2008 and 2010 and were more of a washout. These trades indicate a bearish bias on the companies concerned. The other stakes were very small and again not significant.
    3. Berkshire initiated a large (~3% of total portfolio) stake in Anheuser-Busch (BUD) in 2005. The stake was reduced by ~15% in 2006. BUD was acquired by InBev on November 18,2008 for $70 USD per share in cash,thus eliminating Berkshire’s position. Although the stock is no longer in the portfolio,the stake was huge and was taken away due to an acquisition,thereby indicating a bullish bias.
    4. The other stocks in this category that Berkshire purged in the last decade include H&R Block (HRB),Dean Foods (DF),and Nestle (NSRGY). Berkshire had a ~3% stake in HRB in 2001 that was gradually phased out by 2006,thus indicating a bearish bias. The stock has been in a down trend since the sell-out. DF and NSRGY were very small stakes held for less than two years.
    5. Costco (COST) holds the distinction in the petite category,as the sole Consumer Stapes &Discretionary stock that survived the decade – the stake was however downsized by ~20% in 2010.
    6. Berkshire built a significant retail stake in Walmart (WMT) starting from 2005 and more than doubled the stake in 2009. WMT is currently at ~4% of the total portfolio value and is the single biggest new stake built in the last ten years,indicating a strong bullish bias.

    The spreadsheet below summarizes Berkshire’s holdings in this sector that were sold out in the last ten years.

    • Energy:

    Berkshire Hathaway held stakes in four energy companies in the past decade that has since been sold:

    1. First Energy (FE) was a tiny,insignificant stake liquidated in 2002.
    2. Constellation Energy (CEG) was a large holding (~20 million shares) initiated in 2008 and liquidated the same year. CEG’s share price went into a tailspin in 2008 following news of its exposure to Lehman. Consequently CEG pursued a buyout and ultimately agreed to be bought by Berkshire’s MidAmerican subsidiary. The transaction did not go through explaining the short-term nature of Berkshire’s CEG holdings. CEG has since (April 2011) agreed to be acquired by Exelon (EXE).
    3. NRG Energy (NRG) was a small stake (~0.7%) initiated in 2008 and sold-out in 2010. The timing of the purchase indicates Berkshire may have been trying to book short-term profits as NRG was going through a hostile takeover attempt by Exelon (EXE) then.
    4. PetroChina (PTR) was a small stake (~0.1%) initiated in 2003 and liquidated at more than 5-times profit in 2007.

    The spreadsheet below captures these details:

    • Financials:

    Berkshire Hathaway had stakes in four financial companies during the last ten years that has since been sold:Ameriprise (AMP),Bank of America (BAC),PNC Financial (PNC),and Suntrust Banks (STI).

    1. Ameriprise was a large stake (~30 million shares –~2.5% of portfolio) initiated in 2005 – American Express (AXP) spun-off Ameriprise in 2005 and Buffett sold off the shares Berkshire received following the transaction in the next two years. Given the large size of the stake,the disposition,and the fact the parent company stake was left untouched,it can be inferred Buffett was bearish on Ameriprise while remaining bullish on American Express.

    2. Berkshire acquired a significant stake (9.1 millions shares –~1% of portfolio) in Bank of America in 2007 but disposed about 35% of it in 2008 and the rest in 2010,indicating a bearish bias. Buffett was openly critical of BAC’s then CEO Kenneth D. Lewis and the acquisition of Merrill Lynch in September 2008 saying “He could have bought them the next day for nothing because Merrill was going to go when Lehman went”. The disposal resulted in huge losses for Berkshire as the share price dropped drastically following the financial crisis. As of August 25,2011 Berkshire is reported to have invested $5 billion in BAC preferred shares with a 6 percent annual dividend yield and a 5% call premium.

    3. PNC Financial was a diminutive stake that Berkshire held briefly in 2002.

    4. Berkshire had a fairly large ~1.5% of portfolio stake in Suntrust Banks and held it for more than ten years. The stake was closed-out completely by 2009. It is rare for Berkshire to sell out of significantly large stock positions that were held for a long time. It can be inferred Buffett turned bearish on Suntrust Bank shares.

    The spreadsheet below shows these details:

    • Others:

    Berkshire Hathaway held stakes in nineteen other companies in the last ten years that has since been sold out.

    1. Berkshire held large stakes in Burlington Northern Santa Fe (BNI) and Wesco Financial (WSC) before going on to purchase the entire companies as subsidiaries in 2010 and 2011 respectively.
    2. Berkshire nibbled at a couple of railroad related companies before the acquisition of BNI. The stocks involved were Union Pacific Corporation (UNP) and Norfolk Southern (NSC). The two stakes and the BNI stake were initiated around the same time in 2007. UNP and NSC were disposed off in 2009 and within a year Buffett agreed to purchase the rest of BNI. This pattern of transactions indicates Buffett’s bullish bias on railroad stocks,although two of the railroad stocks changed hands within two years.
    3. Berkshire Hathaway held four Healthcare related companies during the last decade that were sent on its way since. The companies involved were Becton Dickinson &Co (BDX),HCA Inc (HCA),United Health (UNH),and Wellpoint (WLP). HCA Inc (~15 million shares),a hospitals operator,was a small position Berkshire held briefly in 2003. The stakes on healthcare insurers UNH and WLP were initiated between 2006 and 2007 but were sold off within two years. At one point in 2008,Berkshire held a combined stake of more than 1% of the portfolio in these two insurers. The sales hint Buffett turned bearish on health insurers around 2009. BDK ( ~1.5 million shares –~0.2%) was a small stake initiated in 2009 that survived only till 2010. The round-trip for this small transaction was quick and as such is not an indication of a bearish or bullish bias.
    4. Berkshire Hathaway sold stakes in thirteen other companies during the last ten years:Automatic Data Processing (ADP),Comcast Corp (CMCSA),Dun &Bradsheet (DNB),First Data Corp (FDC),Fiserv Inc (FISV),Iron Mountain (IRM),Lexmark International (LXK),Republis Services (RSG),Shaw Communications (SJR),The Travelers Companies (TRV),Tyco International (TYC),Western Union (WU),and Zenith National Insurance Corporation. Most of these were nibbles with holding periods of less than three years and accounting for well under 1% of total portfolio value. As such,those transactions do not indicate a bearish or bullish bias. CMCSA and IRM were the only stocks in the list with holding periods over 5 years. CMCSA (~10 million shares –~0.5% of portfolio) was initiated in 2004 and the shares were sold in 2010 at a loss. The holding period,the size and price of the transaction indicate Buffett’s bearish bias on cable companies. IRM (~8 million shares –~0.3% of portfolio) was initiated in 2002 and sold in 2010 at a sizable profit. It is rare for Buffett to sell out of a stake he has held for many years and so this transaction indicates a bearish bias.

    The spreadsheet below shows the details:

    To summarize,analyzing Berkshire Hathaway’s stock sales in isolation after each 13F quarterly filings offers limited value. Patterns do emerge when sales over a period of years are taken together and classified by sector. The consolidated information allows the ability to figure out Warren Buffett’s bullish or bearish bias on the holdings held over the years.

    Disclosure:I am long BDX,WMT. I have written cash-covered puts on BRK.B (Jan 2012 75).

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