Sunday, November 5

Week 331 - Barron’s 500 Stocks in Berkshire Hathaway’s Portfolio

Situation: There are 43 publicly-traded companies in Berkshire Hathaway’s $180B stock portfolio, 29 of which are in the 2017 Barron’s 500 List. The 10 largest holdings are Kraft-Heinz (KHC - $28B), Wells Fargo (WFC - $23B), Apple (AAPL - $19B), American Express (AXP - $12B), Coca-Cola (KO -$17B), Bank of America (BAC - $17B), IBM - $14B), Phillips 66 (PSX - $7B), US Bancorp (USB - $4B), and Wal-Mart Stores (WMT - $4B). Warren Buffett often speaks of the importance of investing in large and well-established companies, particularly those at the top of their peer group that have long trading records. We’d like to know more about those stocks he’s picked for Berkshire Hathaway’s portfolio.

Mission: Run our standard spreadsheet on the 29 companies in the 2017 Barron’s 500 List, taking care to exclude any that do not have the 16+ year trading history that is required for quantitative analysis per the BMW Method.

Execution: 20 companies fit the bill (see Table).

Administration: The list is dominated by 9 companies in the two highest-risk industries among the 10 standard S&P industries. He has picked 7 companies from Financial Services (AXP, WFC, BAC, USB, MTB, BK, GS) and two from Information Technology (AAPL, IBM). Taken together, the 20 companies have risk parameters that are higher than those for the S&P 500 Index. For example, returns during the recent two-year Bear Market for commodities were 3.8%/yr vs. 6.6%/yr for the S&P 500 Index (see Column D in the Table). The extent of loss (at -2 standard deviations from trendline) in the next Bear Market is predicted to average 38% vs. 30% for the S&P 500 Index (see Column M in the Table). 

Bottom Line: Warren Buffett is “all-in” on his long-standing bet that the US economy will do well going forward. Financial Services stand to gain the most in that event, and 7 of the 20 companies in the Table are in that industry, where he is the unchallenged expert when it comes to pricing their brands and analyzing their black-box financial reports. If you’re like me and hold stock in Berkshire Hathaway, you should be happy that he is sticking to basics, i.e., invest in what you know. The downside is that Warren Buffett is one of a kind. We’re left to hope that he will indeed leave the company in good hands. 

Risk Rating: 7 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-cost average into KO, JNJ, MON, and IBM. I also own shares of AAPL, COST, and WMT.

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