Berkshire Hathaway 4th Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 4th Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 3rd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Positions
Goldman Sachs (GS): Bought 12.6 million shares worth $ 2.1 billion**
Liberty Global (LBTYA): 2.9 million shares worth $ 246.5 million

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential. Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Added to Existing Positions
Wells Fargo (WFC): Bought 326,500 shares worth $ 15 million, total stake $ 21.4 billion
Exxon Mobil (XOM): 1.04 million shares worth $ 97.9 million, total stake $ 3.9 billion
Wal-Mart (WMT): 236,498 shares worth $ 17.9 million, total stake $ 3.75 billion
U.S. Bancorp (USB): 203,400 shares worth $ 32.2 million, total stake $ 3.2 billion
DaVita (DVA): 5 million shares worth $ 332.8 million, total stake $ 2.4 billion**
USG Corporation (USG): 17.8 million shares worth $ 610.4 million, total stake $ 1.2 billion**
General Electric (GE): 9.99 million shares worth $ 257.3 million, total stake $ 272.5 million**

Reduced Positions
Moody's (MCO): Sold 252,400 shares worth $ 20.1 million, total stake $ 1.96 billion
ConocoPhillips (COP): 2.45 million shares worth $ 160.5 million, total stake $ 726.1 million
Liberty Media Corporation (LMCA): 322,340 shares worth $ 43.6 million, total stake $ 716.8 million
Suncor (SU): 5 million shares worth $ 167.3 million, total stake $ 434.2 million
Starz (STRZA): 1.1 million shares worth $ 32.3 million, total stake $ 135.6 million

Sold Positions
Dish Network (DISH): Sold 547,312 shares worth $ 31.1 million
GlaxoSmithKline (GSK): 345,819 shares worth $ 19.3 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers (even if some individual positions are becoming more substantial).

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a less extent, technology (primarily IBM) stocks.

1. Wells Fargo (WFC) = $ 21.4 billion
2. Coca-Cola (KO) = $ 15.6 billion
3. American Express (AXP) = $ 13.5 billion
4. IBM (IBM) = $ 12.5 billion
5. Procter and Gamble (PG) = $ 4.2 billion

As is almost always the case, it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***

We'll get firm numbers when the annual report is released, but the combined portfolio value (equities, bonds, cash, and other investments) will likely exceed $ 210 billion.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

Then there's also the deal Berkshire closed last year for 50% ownership of H.J. Heinz.

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of the operating businesses.

Adam

* All values calculated below are based upon Friday's closing price.
** Goldman Sachs and General Electric common shares came from warrants converted via net share settlement. Convertible notes of USG were also converted into common shares of USG. These all came out of moves made by Buffett during the financial crisis. Berkshire received shares in Goldman Sachs and General Electric from exercised warrants with both deals being amended from cash settlement to net share settlement. The DaVita moves were first disclosed in early December.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi, Tesco PLC, etc.) is updated in the annual letter. So the only way any of these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. The preferred shares in Bank of America are also not included in the 13F-HR.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Munger's Daily Journal Reveals Holdings

Charlie Munger has, on prior occasions, talked about the importance of patience combined with acting decisively when opportunity presents itself:

Success means being very patient, but aggressive when it's time. - Charlie Munger at the 2004 Wesco Shareholder Meeting

and

If you took the top 15 decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. - Charlie Munger at the 2004 Wesco Shareholder Meeting

In addition to his role as vice chairman at Berkshire Hathaway (BRKa), Munger also serves as chairman of Daily Journal (DJCO) and naturally has plenty of influence over their investments.*

Well, earlier this week, the company provided details for the first time of their common stock positions.

More on that in a bit but first some background.

This 10-Q from a couple of years back outlined some of their moves (without naming specifics) into marketable securities in recent years:

In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company. The investments in marketable securities, which cost approximately $45,166,000 and had a market value of about $76,213,000 at December 31, 2011...

Now, compare that to this 8-K that was filed earlier this week:

At December 31, 2013, the Company held marketable securities valued at $150,747,000, including unrealized gains of $102,770,000.

It goes on to say:

The marketable securities consist of common stocks of three Fortune 200 companies, two foreign companies and certain bonds of a sixth, and most of the unrealized gains were in the common stocks.

So it at least appears they still basically have the same positions that were established between February 2009 and early in fiscal 2012 (though, since the cost basis has risen slightly, at least some additional moves -- even if minor in percentage terms -- have been made since then), and we now have a relatively up-to-date view of how well these moves have worked out (so far).

For some context, keep in mind that Daily Journal had a bit less than $ 22 million in cash, U.S. Treasury Notes and Bills at the end of their 2008 fiscal year. They wisely held this rather conservative allocation until prices became extremely attractive in early 2009 then deployed it, along with retained earnings, aggressively into shares of businesses they apparently consider attractive.**

So I'd say they've allocated their capital rather well and that this exemplifies being very patient then acting decisively when the opportunity arises.

As I mentioned above, thanks to this recent 13F-HR, we also now know what 4 of the marketable securities they invested in happen to be:

Wells Fargo (WFC): $ 72.3 million
Bank of America (BAC): $ 35.8 million
U.S. Bancorp (USB): 5.7 million
POSCO (PKX): 5.0 million

That leaves, after subtracting the value of these 4 stocks from the total of $ 150.7 million noted in the 8-K filing, roughly $ 31 million for the remaining marketable securities. So nearly 80% of the portfolio is in just four stocks and, to say the very least, is heavily weighted toward financials. 

Not exactly textbook portfolio management and, well, not exactly surprising.

Munger has talked in the past about his views on the need (or lack thereof) for diversification.***

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?" - Charlie Munger in Kiplinger's

"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken." - Charlie Munger in a 1998 speech

I'd say that the concentration of this portfolio more than reinforces his point.

Unlike the position in POSCO, which is an ADR, it might turn out that the fifth stock (as indicated in the 8-K filing), is listed on an exchange outside the United States. 
(Shares not listed on an exchange inside the United States need not be included in a 13F-HR.)

It seems fair to say that, other than possibly the common stock of Bank of America, none of these positions should really come as a surprise.

Berkshire owns the common shares of Wells Fargo, U.S. Bancorp, and POSCO along with preferred shares of Bank of America.

Adam

(Correction: Charlie Munger's thoughts above on the need for lots of patience followed by aggressive action when the opportunity presents itself are from Whitney Tilson's notes taken at the 2004 Wesco meeting. The initial version of this post had it as the 2004 Berkshire meeting.)

No position in DJCO. Long positions in WFC, USB, and BAC established at much lower than recent market prices. Also, small long position in PKX established near current prices.

* From this 10-Q: The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
** Earnings for Daily Journal came in at ~ $ 8 million per year or slightly less in 2009-11 but was down substantially from those levels in 2012-13. Now, comprehensive full year 2013 financials and the most recent fiscal 1st quarter financials have not yet been made available. The company has said they won't submit a filing (for either reporting period) until internal controls are properly assessed. Here's how they explained it in December of 2013:
Due to a significant increase in the Company's stock price in 2013, the Company no longer qualifies as a smaller reporting company and is now an accelerated filer for the first time. Accordingly, this is the first fiscal year for which an audit of the Company's internal control over financial reporting is required...
So, instead, we only have preliminary full year results. It's worth noting that, during the fiscal year 2013, the company also took on $ 14 million of margin debt, bought New Dawn Technologies, Inc. for $ 14 million -- $ 11.8 million net of cash acquired -- and bought ISD Corporation for approximately $ 16 million.
*** Munger clearly doesn't think much of diversification but does say most individual investors should probably be buying index funds: "Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund." As far as picking stocks he says: "You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge." 
Some will underestimate the difficulty of getting satisfactory results picking individual stocks over the long haul and, mistakenly, will also underestimate the wisdom of owning (i.e. not trading) low cost index funds instead. Those who concentrate their holdings and are overconfident in (or overestimate) their own investment capabilities seem destined for poor or even disastrous results. Portfolio concentration may make lots of sense for the likes of Munger and similarly capable investors, but it's probably going to make a whole lot less sense for many others. So it's knowing limits and staying well within them.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wells Fargo's 2013 Results

Here's a quick summary of Wells Fargo's (WFC) latest earnings:

Full year 2013
- Net income: $ 21.9 billion, up 16 percent from 2012
- Diluted earnings per share: $ 3.89, up 16 percent
- Revenue: $ 83.8 billion, down 3 percent
- Return on Equity (ROE): 13.87%, up 92 basis points
- Annualized net charge-offs as a % of average total loans were less than half than the previous year
- Average loans increased to $ 805.0 billion from 775.2 billion
- Average core deposits increased to 942.1 billion from 893.9 billion

Net interest margin continued to decline from 3.76% at year end 2012 compared to 3.39% at the end of 2013. In a vacuum that naturally is not be a good thing but, in the context of the current interest rate environment and relative to competitors, they continue to do just fine. Net interest margin remains a real relative advantage for Wells compared to other large banks which directly contributes to the bank's more than solid ROE.

One way to look at their performance overall since the financial crisis is that, despite that narrowing net interest margin and the year over year decline in revenue, they just earned $ 3.89 per share compared to $ 2.47 in their peak earnings year leading up to the financial crisis.

In contrast, some other large financial institutions are still earning only a fraction per share of what they earned prior to the crisis or, well, had a far worse fate.

I think it is fair to say that the decline in net interest margin is hardly surprising considering the current interest rate environment.

Any improvement to this environment could favorably impact net interest margin and, ultimately, Wells Fargo's overall earnings power. The good news for shareholders is the bank is doing just fine even if that does not occur anytime soon.

Of course, inevitably, the economic environment will erode some time down the road. When (not if) that time comes, what will matter is whether the bank is capable of handling it. That comes down to things like pre-tax pre-provision profit (PTPP)*, making quality loans, along with sufficient liquidity and capital.

The diluted average share count did decline in 4Q 2013 compared to 3Q 2013 due to buybacks (from 5,381.7 billion to 5,358.6 billion). We'll see if this continues. They did say in their news release that additional shares were bought back through a forward repurchase transaction that's expected to settle in 1Q 2014.

Net interest income after provision for credit losses increased to $ 40.5 billion from $ 36.0 billion, the biggest driver of the increase to earning in 2013. Net interest income was actually slightly down year over year but the reduction in provision for credit losses was substantial. This, more than anything else, was a key driver of the 2013 earnings increase.

Noninterest expense declined to $ 50.4 billion from $ 48.8 billion. This also partly accounts for the increase to earnings.

On the other hand, noninterest income declined from $ 42.9 billion to $ 41.0 billion. This was the biggest hit to earnings and was driven by a decline in mortgage banking. It should be noted that 2012 was an elevated year for mortgage banking activity compared to 2011 and 2010. In fact, the noninterest income not related to mortgage banking were, in total, actually higher year over year.

With these 2013 earnings in mind, consider the following comments about Wells Fargo by Warren Buffett in the 2012 Berkshire Hathaway (BRKa) Shareholder Letter. In the letter, Buffett explains that Wells Fargo's earnings is burdened by "'non-real' amortization charge":**

2012 Berkshire Hathaway Annual Report

"...serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others never lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real expenses. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when calculating earnings – even though from an investor's viewpoint they could not be more different.

He later adds the following:

"A 'non-real' amortization charge at Wells Fargo, however, is not highlighted by the company and never, to my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an 'amortization of core deposits' charge, the implication being that these deposits are disappearing at a fairly rapid clip. Yet core deposits regularly increase. The charge last year [2012] was about $1.5 billion. In no sense, except GAAP accounting, is this whopping charge an expense."

So there may be actually be more earnings power --  economically speaking, even if the accounting indicates otherwise -- at Wells Fargo than meets the eye.

In any case, what Wells Fargo does in any particular quarter -- or, for that matter, any particular year -- just is not that interesting. It may be for traders, it shouldn't be for long-term owners. Similarly, when and by how much interest rates will be up or down isn't something I'm going to try and figure out. Sometimes the environment will be favorable; sometimes it will not be.

What really counts -- since the environment inevitably oscillates between being more and less favorable -- is whether a banking franchise is likely to produce attractive relative and absolute results at less risk over the long haul. The focus is on whether the moat will remain wide (better yet, can it be widened?), smart management of risk, and the long run trend of normalized earning power.***

Banking is by its very nature a very leveraged institution (even if less so these days). The real question with any investment but especially leveraged institutions is whether it has been built to be resilient during times of severe -- especially if systemically destabilizing -- economic stress.

As some learned the hard way during the financial crisis, funding sources for leveraged institutions must remain stable; liquidity plentiful. A bank can look or even be profitable but that won't matter much if suddenly the balance sheet comes under real pressure.

The only thing worse than being forced to raise capital when prices are least favorable for owners, is seeing funds leave, en masse, and being unable to raise capital in a timely manner from other sources.

Quality management will do smart things during the good times that anticipates the not-so-good times.

Adam

Long position in BRKb and WFC established at much lower than recent prices. 

* Pre-tax pre-provision profit (PTPP) -- net interest income, noninterest income minus noninterest expense -- is the first line of defense for any bank against credit losses. Otherwise, those losses begin impacting the balance sheet (i.e. allowance for loan losses and/or shareholders' equity balance). PTPP is a useful measure of a bank's ability to generate sufficient capital to cover credit losses during the worst part of a full credit cycle. Morningstar provides an explanation here (page 3). Strong PTPP relative to assets (and equity) isn't just about the potential for greater returns. It's not just about the upside. To me, what is far more important is that strong core earnings provides greater capacity to absorb credit and other losses that will inevitably arise at some point during a credit cycle even for the highest quality bank. Knowing that pre-tax, pre-provision capacity to earn is strong reduces at least one form of risk (among many others). 
** see pages 12-13 of the letter.
*** Some might be tempted to trade around the environment based upon how more or less favorable it seems. Best of luck. I mean, no doubt there are exceptions who actually do this successfully, but an approach based upon the exception seems more than just a bit unwise to me.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Berkshire Hathaway 3rd Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 3rd Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 2nd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Position
Exxon Mobil (XOM): bought 40.1 million shares worth $ 3.74 billion

Most of the Exxon Mobil shares were actually purchased in the prior quarter but not disclosed.

Berkshire's 2nd Quarter 13F-HR filing did indicate some activity had been kept confidential. That filing said: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."

We now know it was Exxon Mobil that was omitted.

It's certainly a sizable stake.

This separate 13F-HR/A filing (also released yesterday) reveals the specific number of shares of Exxon Mobil that had already been purchased by the end of the 2nd quarter:

31.2 million shares

So that means only 8.85 million shares were actually purchased in the 3rd quarter.**

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

The current 13F-HR filing does not indicate any moves were kept confidential for the 3rd quarter.

Added to Existing Positions
U.S. Bancorp (USB): bought 840,200 shares worth $ 32.2 million, total stake $ 3.03 billion
DaVita (DVA): 1.5 million shares worth $ 87.98 million, total stake $ 1.85 billion
(The stake in DVA is actually now higher compared to end of 3Q.)
BNY Mellon (BK): 8,807 shares worth $ 292,000, total stake $ 816.7 million
Suncor (SU): 240,500 shares worth $ 8.58 million, total stake $ 642.4 million
Verisign (VRSN): 64,100 shares worth $ 3.58 million, total stake $ 611.8 million

Reduced Positions
ConocoPhillips (COP): sold 10.59 million shares worth $ 780.6 million, total stake now $ 996.8 million
DirecTV (DTV): 760,700 shares worth $ 48.95 million, total stake $ 2.35 billion
Sanofi (SNY): 157,800 shares worth $ 8.37 million, total stake $ 207.2 million
GlaxoSmithKline (GSK): 1.13 million shares worth $ 58.9 million, total stake $ 18.03 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage only a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer, and technology (primarily IBM) stocks.

1. Wells Fargo (WFC) = $ 19.96 billion
2. Coca-Cola (KO) = $ 16.08 billion
3. American Express (AXP) = $ 12.42 billion
4. IBM (IBM) = $ 12.41 billion
5. Procter and Gamble (PG) = $ 4.45 billion

As is almost always the case, it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***

The combined portfolio value (equities, bonds, cash, and other investments) was roughly $ 200 billion at the end of the most recent quarter.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

Then there's Berkshire's rather substantial deal for 50% ownership of H.J. Heinz that closed earlier this year.

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of the operating businesses.

Adam

* All values calculated below are based upon yesterday's closing price.
** It's worth mentioning that Berkshire did establish a small position in Exxon Mobil back in 2009, but later sold it.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi, Tesco PLC, etc.) is updated in the annual letter. So the only way any of these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. Also, after the 3rd quarter ended, Berkshire received shares in Goldman Sachs (GS) and General Electric (GE) from exercised warrants (both deals were amended from cash settlement to net share settlement). So, unless sold, those shares will show up in the next 13F-HR filing. Things like the preferred shares in Bank of America will also not show up in the 13F-HR.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

A Bigger Buyback For Apple?

Earlier this year, Apple (AAPL) expanded its share repurchase authorization to $ 60 billion.

Well, Carl Icahn is calling on the company to repurchase more like $ 150 billion in stock. From this recent Icahn letter to Tim Cook:

"We want to be very clear that we could not be more supportive of you, the existing management team, the culture at Apple and the innovative spirit it engenders. The criticism we have as shareholders has nothing to do with your management leadership or operational strategy. Our criticism relates to one thing only: the size and timeframe of Apple's buyback program. It is obvious to us that it should be much bigger and immediate."

Warren Buffett did recently say "I wish I had bought the stock many years ago" and also mentioned he had advised Apple on buying back their stock -- if they thought it to be undervalued -- a few years ago or so.
(At that time they did not.)

Buffett is no small fan of buybacks when they make sense yet said the following about the pressure on Apple to buyback even more of their stock than they are already doing:

"I think the Apple management and directors have done a pretty darn good job of running the company. My vote would be with them."

He then added this:

"I do not think that companies should be run primarily to please Wall Street and largely shareholders who are going to sell. I believe in running Berkshire for the shareholders who are going to stay and not the one's who are going to leave."

So they agree on how well the company is being run.

The important difference comes down to time horizon.

Buffett has always had a strong bias in favor of building and serving a base of shareholders who mostly are going to stick around for the long haul. With that in mind, he naturally has a preference that decisions are made, first and foremost, for long term owners. He's just not that enthusiastic about responding to pressure from someone who might not be around as a part owner for very long.

Pressure for change from those who intend to own shares for years to come -- under the right circumstances -- can be just fine; pressure from those with shorter time horizons is not.

So those who push for action to achieve a profitable near term outcome then move onto the next target should be considered of secondary importance to those in it for the long haul.
(What moves the stock up near-term may or may not also be favorable for long term owners.)

Still, what Carl Icahn usually does is hardly the equivalent of short term trading.

Agitating for fundamental change at the senior management and board level can be a very useful thing. No doubt more than a few companies need it. In fact, the investing world would benefit from more large shareholders who are willing to do so and are competent at it. The question is whether those who push for the change are willing -- alongside other owners -- to stick around for the long run repercussions of the change they helped facilitate.

Some will no doubt argue that the sticking around part isn't all that important as long as the right kind of change happens.*

Icahn wants Apple's board to move more aggressively and announce a $150 billion tender offer. He thinks it should be financed with debt or a mix of debt and balance sheet cash.

In the letter, Icahn does say "to invalidate any possible criticism that I would not stand by this thesis in terms of its long term benefit to shareholders, I hereby agree to withhold my shares from the proposed $150 Billion tender offer. There is nothing short term about my intentions here."

Of course, that definition of long term -- a willingness to withhold shares during the tender offer -- probably isn't exactly a time horizon that Buffett would consider long term.

Now, if someone like Carl Icahn can actually improve corporate governance more generally (and maybe improve/change the laws of consequence that can undermine long term oriented owners) that would be a very useful thing.

The quarterly results Apple released back in July revealed they've already been buying back a whole lot of stock. The company was also likely doing so, in a meaningful way, during the quarter that just ended.

One of Icahn's chief concerns seems to be that the window to buyback the stock when it is actually cheap will close sooner than later. That's certainly a legit concern. Now, the existing $ 60 billion buyback authorization is not exactly small but, the question is, how fast can it be executed. The company indicated back in April it expects the buyback to be completed by the end of 2015.

Well, if the buyback takes all of that time to complete and the stock price rises materially, it just won't be as effective as it could otherwise be. It may still have a favorable impact, of course, but a bit less so than if it were completed while the stock was selling for much less.**

It's also possible that the stock becomes truly expensive. In that case the buyback should naturally be halted. Buybacks generally only make sense when the share price represents a plain discount to per share intrinsic value, the company is comfortably financed, no superior alternative investment(s) exist, and all other important expenditures (including whatever solidifies/widens the moat) are covered.

Apple reports its quarterly results next week. At that time, it will become more clear just how much more stock they've been buying since they last reported.

The buyback activity may not be quite as much as some would like to see, but they still likely repurchased more than a few shares outstanding.

In any case, I'll still never really be all that comfortable with tech stocks as long-term investments.

They have, on occasion, become of mild interest (in small doses) when selling at a substantial discount to conservatively estimated per share intrinsic value.

That's about it.

Adam

Long position in AAPL established at much lower than recent prices

* The following seems relevant here. Does the owner of an asset (e.g. a car), someone who intends to sell sooner than later, spend money on the things that will assure reliable performance many years from now or, instead, mostly just do those things that polish it up for sale? Time horizon impacts owner behavior. This naturally also applies to businesses. Crucial things must be often be done today to make sure a business remains competitive many years down the road. Those who are mostly (if not entirely) trying to get a near term result aren't likely to weigh those important long term considerations appropriately against their own near term objectives and interests. Sometimes there's no tension between near term and long term considerations; other times there is.
** One wonders how much of the recent rally in the stock can be attributed to Icahn's actions. In other words, how much has the higher than otherwise price inadvertently reduced Apple's buyback effectiveness. That may not be precisely knowable but it certainly matters. Around the more recent market prices, the buyback is already meaningfully less impactful than it would have been not long ago.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Best Global Brands 2013

According to a report by Interbrand released late last month, Apple (AAPL) is now the most valuable global brand.

Coca-Cola (KO) had held the top spot for 13 straight years in prior Interbrand reports.

It now sits at number 3.

Top Ten Most Valuable Global Brands
1 Apple
2 Google (GOOG)
3 Coca-Cola
4 IBM (IBM)
5 Microsoft (MSFT)
6 General Electric (GE)
7 McDonald's (MCD)
8 Samsung (SSNLF)
9 Marlboro (INTC)
10 Toyota (TM)

Website: Best Global Brands 2013

Press Release: Interbrand's 14th Annual Best Global Brands Report

Report: Best Global Brands 2013

This top ten ranking of global brands has some similarities to the entirely separate ranking of global brands released earlier this year by Millward Brown.

Apple, Google, Coca-Cola, IBM, Microsoft, and McDonald's make the top ten on both lists. The specific value these two rankings place on each brand is in some cases, not surprisingly, very different (e.g. the study earlier this year puts Apple's brand value at $ 185 billion, the newer ranking places it at more like $ 98 billion).

Some of the are differences between the two rankings will naturally come down to methodology.

Interbrand's methodology is explained here. For inclusion in their rankings, a brand needs to have a "truly global" presence as defined by their methodology.

"In measurable terms, this requires that:

- At least 30 percent of revenues must come from outside the brand's home region
- It must have a presence in at least three major continents, as well as broad geographic coverage in emerging markets
- There must be sufficient publicly available data on the brand's financial performance
- Economic profit must be expected to be positive over the longer term, delivering a return above the brand’s operating and financing costs
- The brand must have a public profile and awareness above and beyond its own marketplace.

These requirements...lead to the exclusion of some well-known brands that might otherwise be expected to appear in the ranking. The Mars and BBC brands, for example, are privately held and do not have publicly available financial data. Walmart, although it does business in international markets, often does so under a variety of brands and, therefore, does not meet Interbrand's global requirements. 

For similar reasons, brands in several sectors have been excluded."

These are:

Telecommunications - strong ties to their national markets but "awareness challenges" further away from home.
Airline industry - capital intensiveness and low margins result in brands that "struggle to achieve positive economic profits over the long term."
Pharmaceutical companies - consumer relationship is generally with the product brands (more so than the corporate brand owner) and "insufficient publicly disclosed financial data on pharmaceutical product brands."

Top 100 Global Brands

Among the top 100, Nokia's (NOK) brand, took the biggest hit in both absolute and percentage terms. Not exactly a surprise.

Google was the biggest gainer in absolute terms.

Facebook (FB) was the biggest gainer in percentage terms.

To me, it seems rather unlikely that brand value could ever be pinned down -- and I mentioned this in the post on Millward Brown's rankings -- as precisely as might be implied by these rankings.

Still, these studies are provide some indication which brands matter around the world and how -- in at least a rough sense -- their value might be changing.

Adam

Established long positions in AAPL, GOOG, KO, MSFT, and GE at much lower than recent prices. Recently added small new IBM position.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Apple's Record-Breaking Launch

Apple (AAPL) sold nine million iPhone 5S and 5C smartphones over this last weekend topping the former first weekend record sales of five million for the iPhone 5.

Or did they?

Apple's 9 million weekend

Some are arguing that the numbers are inflated while others maintain that the nine million number is a sound one (and maybe even understated).

Apple analysts and the nine-million iPhone kerfuffle

The company also separately announced that revenue and gross margin would be near the high end of their previously provided range.

So, I guess, it'll take some time for the dust to settle on this. I'll happily leave that for others to sort out. Whether they sold a bit more or less than nine million that's an awful lot of business -- rather profitable I might add -- in one weekend.

Eventually Apple's cumulative product execution will matter massively, of course, but the company's intrinsic business value and how it may change certainly can't be figured out based on one product launch.
(Though this reality no doubt won't stop some from trying to make short-term bets on price action based upon perceived the success/failure of a particular launch. Nothing wrong with that, of course, but my interest in that sort of thing happens to be effectively zero.)

If the nine million turns out to be a reasonably good number then that's, give or take, more than $ 5 billion in just one weekend. This assumes something close to the $ 581 price per iPhone from the previous quarter roughly holds up.
(The unsubsidized/unlocked price is, of course, much higher than the suggested retail price with a two-year contract.

iPhone Price and Specs

The question is how many upgraded phones were purchased and the related product sales that might have occurred.

The 16GB iPhone 5S sells for $ 649. The 32GB and 64GB versions each sell incrementally for $ 100 more.

The 16GB iPhone 5C sells for $ 549 with the 32GB version selling for $ 100 more.

With that pricing in mind the $ 581 per iPhone assumption doesn't at all seem a stretch.

This is especially true considering that the 5S apparently outsold the 5C by more than 3x.

Consider that $ 5 billion plus sold in one weekend, if correct, in the context of Apple's sales history. For some perspective, Apple's sales across everything it was selling back in 2003 was $ 6.2 billion over the course of a full year.

So, during a product launch, they can now nearly sell in a bit more than a few days what roughly a decade ago would have taken all year.

Keep in mind that what they are selling has far more attractive margins -- at least for now -- than what they were selling a decade ago.

In fact, Apple was barely turning a profit back in 2003.

Who knows how well the newer smartphones will perform long-term, but whether they're sustaining price, attractive margins, and high returns on capital is far more important than unit volume.

As the negative reaction to the pricing for the 5C reveals, some don't necessarily agree with this premise.

The reaction is unsurprising but enlightening.

Shares of Apple slide, analysts cut targets in disappointment over iPhone 5c pricing

It's, in part, a belief that not so profitable growth early on will lead to big profits later; a belief that market share is king.

That is a strategy (and sometimes maybe even the right one).

So is making sure your product earns then maintains a premium position in the market. It is not easy getting price back once you've given it up. It's not easy to get back a premium image once you've sold something for cheap.

I'm not suggesting I know the correct way to go for Apple. I certainly do not. I'm suggesting it's not a straightforward call and they may just be doing the right thing. Time will tell. Those who confidently assert Apple needs a lower priced iPhone should probably at least be a little less confident.

It's not easy to maintain price in the business they are in. I'm more than a little bit amazed they can do it. I'll be surprised if they pull it off longer term.

Still, if anyone can it's probably going to be Apple.

Market share matters to an extent, of course, but so does profit share.

Apple takes 53% of smartphone profits, Samsung at 50%, remainder lose money

This article has a useful chart on how mobile phone operating profits have changed in the past five years or so through the end of 2012.

Apple has roughly half the profit share with just 13.5% market share. Half the profit share might be impressive, but that is down compared to the previous quarter and where it was in 2011 and 2012.

As I've said on prior occasions, I'll just never be very comfortable with tech stocks as long-term investments.*

Occasionally they become interesting in small doses if they're selling at a very large discount to my own conservative estimate of per share intrinsic value.**

Essentially it has to be a price where nothing particularly great has to happen to get a good result.

Prices like that don't emerge everyday but they do occasionally emerge.

It's patience and discipline followed by decisive action.

While I admire the way a business like Apple can change the world, as an investor I'm just no fan of businesses that reside in such a fast-changing and competitive industry landscape -- a place where the core economics can change quickly. When, over roughly just five years, the distribution of industry profits can change as dramatically as the article and chart above shows, it should make no investor comfortable about the next five or ten years. The best businesses reside in industries they dominate with no such profitability dynamics.

Some businesses that change the world end up being wise investments; some do not.

I mean, what's been better for the world, airlines or tobacco companies?

Yet just compare their long-term returns.

The price that's paid (margin of safety) and whether durable advantages exist (to protect attractive core economics) should mostly determine long-term investment outcomes. An investor has to judge future prospects and value well then pay a smart price considering the risks.

I'm not suggesting that product announcements are irrelevant. I'm suggesting that the next product announcement -- even a relatively important one -- should matter a whole lot less than the bigger picture. Some may find the obsessive hyperactive focus on near-term events in combination with betting on how the stock might react to be an entertaining exercise.

Well, hopefully it is entertaining because for most, if not all, it seems unlikely to produce great results over the long haul.

Adam

Long position in AAPL established at much lower than recent prices

* Though I'm not suggesting all tech businesses are somehow poor long-term investments or are created equal. It's just that technology businesses tend to have a wider range of outcomes. Some of those outcomes will be phenomenal even if often difficult to reliably predict beforehand. Some are no doubt very good at judging the long-term prospects of tech businesses while others might be overestimating their ability in this regard. I try to avoid making the latter mistake whenever possible.
** Of course, my estimate of value -- especially with a tech stock that tends to have a wider range of outcomes -- could easily be wrong. That's where the larger margin of safety requirement comes in. Sometimes the future is so difficult to figure out that no margin of safety is sufficient. Eventually the investment process needs what is effectively a go/no go gauge.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Dow Jones Adjusts Roster

On Tuesday, it was announced that some roster changes would occur among the 30 components that make up the Dow Jones Industrial Average (DJIA).

What's in:
Goldman Sachs (GS)
Nike (NKE)
Visa (V)

What's out:
Alcoa (AA)
Hewlett-Packard (HPQ)
Bank of America (BAC)

The changes become effective on September 23rd.

This Barron's article explains why the recent changes to the widely known index might be ill-advised.

It's not difficult to argue that, even before these changes, the index had a more than somewhat bizarre weighting for its components.

Well, the recent changes certainly haven't come near to solving that particular fundamental problem.

The Barron's article points out the following:

- Five stocks -- International Business Machines (IBM), Chevron (CVX), Goldman Sachs, 3M (MMM), and Visa -- will now make up roughly 33% of the index.

- Four stocks -- General Electric (GE), Pfizer (PFE) , Intel (INTC), and Cisco (CSCO) -- will now make up less than 5% of the index due to their relatively lower stock prices.

Now, consider that the combined market value of the five stocks is ~ $ 720 billion, while the combined market value of the four stocks is ~ $ 670 billion.

So maybe not quite an equal combined value, but close enough that the 33% versus the less than 5% weighting plainly makes little sense.

In fact, those four stocks that make up less than 5% of the DJIA have nearly 9x the combined market value relative to Goldman Sachs alone. Yet, they'll have less influence on the DJIA than the investment bank.

At first glance (and, well, even a second one) some rather tortured logic appears required to explain why such a weighting discrepancy should exist in a closely-watched benchmark.

This all comes down to the DJIA being a price-weighted index instead of a capitalization-weighted index.

The index has each of its 30 components weighted by their stock price.

So it is a bit of a strange index.

At current prices, IBM has the largest influence on the index (followed by Visa then Goldman).

Microsoft (MSFT), with more than 3x the market value compared to Goldman, will have roughly one-fifth the influence due to the price weighting.
(Goldman's shares price is roughly $ 163; Microsoft's is closer to $ 33.)

The list of quirks like this related to the weighting by price goes on...

Visa and Nike are fine businesses, and certainly seem to be reasonable additions, though it's worth mentioning they seem not at all cheap. Both companies sell at P/E ratios comfortably north of 20x.

Goldman, on the other hand, seems an imperfect choice considering alternatives. It's not a traditional bank that mostly makes its money from lending and related services. Instead, it is primarily involved in trading and related activities.

That kind of activity certainly has its place in the world but hardly makes Goldman the ideal candidate.

To me, there are other public companies that provide more broad-based insight into the U.S. economy.

The fact that Goldman will have an outsized impact on the index because of its stock price only makes the situation worse.

The removal of Alcoa seems a vast improvement and long overdue. Its low stock price has meant its influence has been small. There are, and have been, many superior blue chip companies out there to take its place.

With J.P. Morgan Chase (JPM) already in the index, it's not hard to understand the removal of Bank of America.

Hewlett-Packard has had its fair share of difficulties but, with big cap tech companies Microsoft, IBM, Cisco, and Intel already in the index, it also seems sort of redundant.

Of course, HP is selling for an extremely low multiple and at least so far, despite the difficulties, has continued generating lots of free cash flow. On a multiple of earnings basis, both Visa and Nike would need to roughly triple their earnings before they catch up to what HP is already earning now.
(And/or HP earnings could shrink, of course.)

So Visa and Nike have a much greater index weighting with much less earning power. I can understand a growth argument here, but that's a whole lot of growth just to catch up earnings-wise.
(Or, again, some kind of collapse in earnings for HP.)

The bottom line is that the stocks being removed have an average price of $ 15/share while those being added are more like $ 140/share. This should be irrelevant but, due the price weighting, it is not.

The Barron's article argues that Berkshire Hathaway (BRKb) would make a logical addition since it has broad exposure to many aspects of the U.S. economy.

Hard to disagree with that.

It would need to be the Berkshire Class B shares of common stock, of course. At roughly $ 170,000 per share, the Class A shares would totally dominate the price-weighted index.

Economically, the Class B common shares are equal to 1/1,500th of the Class A common shares.* So, at more like $ 113/share, they'd work just fine.

DJIA remains quite an idiosyncratic index yet, for many, it remains the proxy for overall stock performance and the U.S. economy more generally.

Despite its oddball weighting system, for better or worse, it's still a widely followed index even if less so for Wall Street these days.

Here's one way to gauge this. Apparently, something like $ 30 to 35 billion is indexed to the DJIA while approximately $ 1.6 trillion is indexed to the S&P 500.

So only 2 percent or so as much in funds is indexed to the DJIA versus the S&P 500.

Adam

* Though the Berkshire Class B shares have only 1/10,000th of the voting rights compared to the Class A shares.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Munger's Daily Journal: Decisive Shift Into Stocks

Daily Journal Corporation (DJCO) has had, to say the very least, substantial success with its investments in recent years.

Daily Journal is a publisher based in Los Angeles that has been shifting its excess cash into stocks picked by Charlie Munger and J.P. Guerin.

Charlie Munger is the non-executive chairman of Daily Journal and, of course, the vice chairman of Berkshire Hathaway. While better known for serving as Warren Buffett's business partner, he's also been more quietly serving as the chairman and a director at Daily Journal since 1977.

J.P. Guerin is the vice-chairman of Daily Journal.

Well, they've had so much success in recent years that, back in February of 2013, the SEC formally asked why Daily Journal shouldn't be considered an investment company (as defined in the Investment Company Act of 1940).

Here's the Daily Journal's rather lengthy response.

Among other things, the SEC noted the high percentage of Daily Journal's total assets that are now marketable securities. This is important for the following reason as explained in Daily Journal's response: "...the Investment Company Act (the 'Act') defines an investment company as an issuer (i) 'engaged … in the business of investing, reinvesting, owning, holding, or trading in securities' and (ii) whose assets are at least 40% investment securities."

They go on to further explain that "the Act exempts from this definition any issuer 'primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities.'"

I found this part of their response, where they explain why in their view the above noted exemption applies, of particular interest:

"...Daily Journal is not just 'primarily' engaged in businesses other than investing - it is entirely engaged in other businesses. The Company and its two wholly-owned subsidiaries have nearly 275 employees and contractors, all of whom are engaged either in the publication of newspapers and magazines or the development and licensing of case management software.

There is no question that Daily Journal's marketable securities currently exceed 40% of its total assets. This is due to the wise decision of the Board of Directors in 2009 to begin shifting the Company's cash and cash equivalents into marketable securities that have appreciated significantly. The Board recognized that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero, notwithstanding rising inflation.

That the Company even had excess cash to invest is due primarily to the confluence of a unique aspect of its publishing business and the country's largest financial crisis in more than 70 years. The Company's newspapers are 'adjudicated', which means they are eligible to publish legal notices, including notices of residential foreclosure sales that are required by California and Arizona law to be published by the foreclosure trustee in an adjudicated newspaper. The Company aggressively competes for the opportunity to publish trustee foreclosure notices, and there were lots and lots of them to be published in California and Arizona beginning in 2006.

So, while the 'Great Recession' ironically benefitted Daily Journal, the Board knew that it needed to plan for the Company's post-recession operations. To do that, the Company needed to (1) hedge a very difficult environment for newspapers generally, (2) provide for an asset base from which to pursue attractive acquisition opportunities, and (3) establish a minimum net worth that would enable it to bid on significant government software contracts that the Company had been too small to qualify for in the past. Accordingly, the Board decided to purchase three securities selected by Charles Munger, the Company's non-executive chairman, and J.P. Guerin, the Company's vice-chairman. Those investments were quite successful, and the Company now holds positions in six securities."

In July of 2013, the SEC said they had completed their review while making it clear future actions could still be taken.

Consider that, at the end of 2004, Daily Journal had net cash and investments (at that time primarily U.S. Treasury Bills) of $ 11.26 million. After subtracting notes payable of $ 4.55 million, net cash and investments was ~ $ 6.71 million.*

As of the most recent quarter -- nearly but not quite 10 years later -- Daily Journal had cash and investments (now, primarily made up of the six stocks) of $ 134.7 million. After subtracting $ 14.0 million in margin borrowing net cash and investments was ~$ 120.7 million.**

So I'd say they've put their capital (including free cash flow over that time) to rather wise use over the past decade or so.

Adam

No position in DJCO

* In 2004, Daily Journal earned $ 3.73 million on $ 34.82 million in revenue. While earnings have been quite a bit higher in recent years, the company has earned $ 2.81 million on $ 26.65 million in revenue over the first three quarters of 2013. A similar annualized run rate. Still, seems tough to judge what the future earning power might be. So, as is pointed out above, though Daily Journal was actually impacted favorably by the "Great Recession", earnings appear to be coming back down to earth from temporarily inflated levels. The important lesson is that, instead of, with excess cash, making dumb investments in the core business that might have generated questionable returns, they waited patiently then decisively bought marketable securities they believed to be mispriced and cheap. That should sound familiar to anyone who's been following what Charlie Munger and Warren Buffett have been saying and doing over these many years.
** Investments were primarily in common stocks but also certain bonds were purchased as explained in the Liquidity and Capital Resources section of prior 10-Qs and 10-Ks. Also consider that Daily Journal recently invested $ 14.0 million in cash -- $ 11.878 million net of cash acquired -- to buy all of the outstanding stock of New Dawn Technologies. So cash and investments would otherwise be even greater.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Berkshire Hathaway 2nd Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 2nd Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 1st Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Positions
Suncor (SU): Bought 17.8 million shares worth $ 581.4 million
Dish (DISH): 547 thousand shares worth $ 24.5 million

Added to Existing Positions
Wells Fargo (WFC): Bought 4.96 million shares worth $ 213.8 million, total stake now $ 20.0 billion
U.S. Bancorp (USB): 16.8 million shares worth $ 621.8 million, total stake $ 2.9 billion
General Motors (GM): 15.0 million shares worth $ 533.6 million, total stake $ 1.4 billion
BNY Mellon (BK): 5.7 million shares worth $ 175.1 million, total stake $ 756.3 million
National Oilwell Varco (NOV): 1.4 million shares worth $ 102.4 million, total stake $ 651.8 million
Chicago Bridge & Iron (CBI): 3.0 million shares worth $ 183.7 million, total stake $ 576.9 million
Verisign (VRSN): 2.7 million shares worth $ 134.1 million, total stake $ 536.7 million

Not all of the activity has been disclosed. In the 2nd quarter of 2013, apparently some activity was kept confidential. Berkshire's 13F-HR filing says: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

This makes sense because the total value of disclosed purchases in this 13F-HR do not come close to equaling the total purchases indicated by the Consolidated Statement of Cash Flows in their latest quarterly results.

Reduced Positions
Moody's (MCO): Sold 3.5 million shares worth $ 228.8 million, total stake now $ 1.6 billion
Mondelez International (MDLZ): 6.5 million shares worth $ 204.6 million, total stake $ 18.3 million
Kraft Foods Group (KRFT): 1.4 million shares worth $ 77.8 million, total stake $ 10.6 million
GlaxoSmithKline (GSK): 34.5 thousand shares worth $ 1.8 million, total stake $ 76.6 million

Sold Positions
Gannett (GCI): 1.7 million shares worth $ 44.6 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage only a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer, and technology (primarily IBM) stocks.

1. Wells Fargo (WFC) = $ 20.0 billion
2. Coca-Cola (KO) = $ 15.8 billion
3. IBM (IBM) = $ 12.8 billion
4. American Express (AXP) = $ 11.5 billion
5. Procter and Gamble (PG) = $ 4.3 billion

As is almost always the case, it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.**

The combined portfolio value (equities, bonds, cash, and other investments) was roughly $ 200 billion at the end of the most recent quarter.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of the operating businesses.

Adam

* All values calculated below are based upon yesterday's closing price.
** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi, Tesco PLC, etc.) is updated in the annual letter. So the only way any of these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. Things like the preferred shares in Bank of America are also not included in the 13F-HR.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.