Monday, November 1

Month 124 - 13 Berkshire Hathaway Large-Cap Stocks - October 2021

Situation: The “Oracle of Omaha” continues to bring undervalued companies to light. Last July, Warren Buffett began building a new position in Verizon Communications (VZ) now worth over $9 Billion, making it the 7th largest holding in Berkshire Hathaway portfolio. So, why did he buy a stock that has lost 5% in value over the past 12 months and is given a BUY recommendation by only 25% of analysts? Let’s find out, starting with our yearly analysis of Berkshire Hathaway’s stock holdings. Our last look (Month 103), in January of 2020, was confined to the 8 A-rated stocks in that portfolio. This month, we’ll look at 13 major holdings that represent 84% of a portfolio containing 46 holdings.

Mission: Analyze companies that represent at least 0.2% of the portfolio’s value, excluding any that don’t fit our scheme of analysis: Companies must have a 20+ year trading record, an S&P Bond Rating of BBB or better, an S&P Stock Rating of B/M or better, positive Earnings Per Share (TTM), and positive Book Value (mrq)

Execution: see Table of 13 companies.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Four companies (MRK, AAPL, MCO, MMC) meet that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which directors choose to capitalize their company by issuing long-term bonds rather than common stock (see Column V). One company (MRK) has a BUY rating from Morningstar, and 3 companies have Long-Term Debt to Equity ratios that are less than 1.0 (AMZN, BK, USB).  Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Eleven companies (AMZN, AON, AAPL, MCO, MMC, AXP, BAC, VZ, KR, BK, USB) have Retained Earnings after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Two companies have PEG ratios under 2.0 at both time points (MRK, BK). Managers are also respected for conserving cash, meaning operating expenses do not exceed 40% of net sales (Column Z). Five companies meet this Operating Ratio standard (MRK, MCO, AXP, VZ, KO). NOTE: only one company (MRK) has been cited 4 times.

Bottom Line: In terms of quantitative analysis of the 20 year trading record (Columns O, P and Q in the Table), 5 companies have high price appreciation (Column O) relative to their risk of loss (Column Q): AMZN, AON, AAPL, VZ, KO. Warren Buffett likes companies with intrinsic value, and such outperformance is indicative of long-standing intrinsic value. He looks for a wide “moat” of competitive advantages, especially barriers to entry. Seen through that lens, VZ has assembled a superior set of assets (microwave spectrum) vs. AT&T (T) and T-Mobile (TMUS).

Risk Rating: 8 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into MRK, VZ, KO and USB, and also own shares of AMZ.

"The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

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