Buffett highlights top 4 stocks in shareholder letter

Berkshire Hathaway is likely to increase its stakes in Amex, Coca-Cola, IBM and Wells Fargo.

By GuruFocus.com Mar 7, 2013 3:03PM
Stock market copyright Zurbar, age fotostockWith the recent release of Berkshire Hathaway (BRK.A)(BRK.B)'s annual report, Warren Buffett called his company's 2012 performance "subpar," despite growing book value $24.1 billion with a portfolio of 41 stocks valued at $75.3 billion. 

In his most recent shareholder letter, Buffett said that Berkshire's ownership interest in four companies -- American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC) -- is likely to increase in the future. At year end, they have a total unrealized gain of $26.7 billion. Berkshire received $1.1 billion of dividends from those shares. Read the complete shareholder letter from Berkshire Hathaway here.

With a prevailing interest in DaVita Healthcare Partner (DVA), Berkshire's 2013 buying behavior seems to say this expanding health care provider of kidney-dialysis services is poised for growth in the U.S. and Europe. With the recent string of DVA adds to the Berkshire Hathaway portfolio -- as of Feb. 27, 2013, its current DVA shares are 14,808,959. 

Here's a review of the top four companies mentioned in Buffett's shareholder letter:  

Buffett's No. 1 holding is currently Wells Fargo, with a portfolio weighting of 20%, and 439,857,861 shares.

The massive bank serves one out of three households in the U.S., and in 35 countries. Buffett has commented on the excellent management of his favorite bank, ranked fourth in assets but first in the market value of its common stock of all U.S. banks. Considered one of the fastest recovering banks after the industry implosion, Wells Fargo management was responsible for turning the bank around several years ago. In the past, Buffett has cited its low cost of funding, a powerful advantage in lending. Wells Fargo is a corporation organized under the laws of Delaware and a financial holding company and a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Wells Fargo has a market cap of $187.38 billion; its shares were traded at around $35.55 with a price-to-earnings (P/E) ratio of 10.6 and price-to-sales (P/S) ratio of 2.2, and pay a dividend yield of 2.6%. The bank has had an annual average earnings growth of 1.5% over the past 10 years.

Buffett noted in a previous annual letter: "The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels."

Buffett's No. 2 holding is Coca-Cola, with a portfolio weighting of 19.3%, for 400,000,000 shares.

A world-wide brand, the Coca-Cola Company is known for its carbonated beverages, as well as products like tea and juice. Approximately 75% of the company's revenue is generated outside the U.S. The famous beverage is well known in almost every country in the world.

Considered a very healthy company with consistent growth, Coca-Cola had an annual average earnings growth of 9.6% over the past 10 years. It has a market cap of $172.16 billion; its shares were traded at around $38.63 with a P/E ratio of 19.6, P/S ratio of 3.7, and a dividend yield of 2.6%. GuruFocus rated Coca-Cola with the business predictability rank of 5-star. Calling himself late to the party, Buffett has commented on the longevity of the Coke brand, which he bought in 1988 along with Freddie Mac. Buffett said of his new purchases at that time:

"In 1988 we made major purchases of Federal Home Loan Mortgage Pfd. (Freddie Mac) and Coca Cola. We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds."

Buffett's No. 3 holding is currently IBM, with a portfolio weighting of 17.3%, for 68,115,484 shares.

Buffett has praised IBM leadership for rescuing the company from the brink of bankruptcy 20 years ago and making it into a successful business today. In last year's annual letter, he cited IBM management's extraordinary operational accomplishments, saying, "Their financial management was equally brilliant, particularly in recent years as the company's financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders."

IBM was incorporated in the State of New York on June 16, 1911, as the Computing-Tabulating-Recording Co. The company today has a market cap of $227.92 billion; its shares were traded at around $204.5 with a P/E ratio of 14.1 and P/S ratio of 2.2. The stock's dividend yield is 1.7%. IBM had an annual average earnings growth of 12.1% over the past 10 years. GuruFocus rated International Business Machines Corp. with the business predictability rank of 5-star.

Buffett's No. 4 holding is currently American Express, with a portfolio weighting of 11.6%, and 151,610,700 shares.

To create an entire value chain, American Express segmented its credit card and lending business into three businesses: U.S. card services, international card and global commercial services, and global network and merchant services. As owner of the entire value chain, AXP has created a profitable niche for itself in the financial service markets, offering a great potential for profits. With a closed looped of its own related products and services and marketing, AXP pricing has a built-in competitive advantage.

American Express was founded in 1850 as a joint stock association and was incorporated in 1965 as a New York corporation. The company has a market cap of $69.06 billion; its shares were traded at around $62.5 with a P/E ratio of 16 and P/S ratio of 2.3. The dividend yield of American Express Co. stocks is 1.3%. American Express Co. had an annual average earnings growth of 5% over the past 10 years. GuruFocus rated American Express Co. with the business predictability rank of 3.5-star.

Berkshire is drawn to the fair value computation of AXP, an undervalued stock with room to grown, as well as the dividend. AXP is an opportunity for investors and, according to Buffett’s recent shareholder letter, he may be adding more shares in the future.

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