Sunday, February 5

Week 293 - Berkshire Hathaway’s “Core Holdings”: Stock in 7 A-rated Barron’s 500 Companies

Situation: We can all agree that Warren Buffett is a good stock-picker. So, why does he favor the same “plain vanilla” stocks that get talked-up by your cab driver and the shoe shine guy at the airport?

Mission: Find out which stocks he’s purchased for Berkshire Hathaway, then put those through the wringer (our standard spreadsheet).

Execution: Scan Berkshire Hathaway’s latest 13F quarterly filing of 46 common stock holdings for companies have a) revenues large enough to be on the 2016 Barron’s 500 List, b) at least 16 yrs of trading records, and c) Standard & Poor’s credit ratings of at least A- and stock ratings of at least A-/M. 

Administration: Berkshire Hathaway holds 7 A-rated stocks, which are worth ~$56 Billion (see Columns AB and AC in the Table) and represent ~43% of the portfolio’s value. All 7 are “high quality” companies with household names: Costco Wholesale, IBM, Coca-Cola, Johnson & Johnson, Procter & Gamble, Wal-Mart Stores, and Wells Fargo.

Bottom Line: If someone new to investing had asked you to name some good stocks, most of you would have mentioned stocks on our list. Is that because we like to read about Warren Buffett’s stock picks? Or is it because Warren Buffett likes to read about companies that have products and services that are consistently praised by consumers and businesses? Either way, you need (and want) to mimic his best stock picks, no matter how boring and obvious. How do we know they’re his best stock picks? Because he calls Berkshire Hathaway’s stock portfolio a “float”, meaning the place where insurance premiums are stored until they’re needed to pay for some catastrophe. These 7 high-quality stocks account for 43% of the 46-stock portfolio he uses for safe-keeping. They’re the anchor that will keep the company “afloat” through storms.

Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into IBM, PG and JNJ, and own shares in KO and WMT.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 5-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K ( Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is chosen to approximate Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 22 in the Table. The ETF for that index is MDY at Line 15.

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