Tracking Buffett 2

It's that time again. It's been more than six months since we reviwed Buffett's stock holdings. A lot has been going as Mr. Buffett has been busy putting his cash to work. He has reduced or eliminatd some positions while taking significant new positions along the way.

Berkshire significantly reduced its stake in Pier 1 (NYSE: PIR) as the furniture retailer has continued to struggle. He continues to hold a small position. Apart from a few full divestments, Buffett has pared back his positions in H&R Block (NYSE: HRB) by around 40%, Gap (NYSE: GPS) by 35%, Sealed Air (NYSE: SEE) by almost 38%, and Iron Mountain (NYSE: IRM) by 30%. I was a bit surprised by the 16% reduction in Home Depot (NYSE: HD), but this does not seem to be a significant sale at this stage since he had increased his position by 429% in Q3 of 2005. In fact I would use a bit more weakness in the shares to add to my position.

Meanwhile, the additions to the portfolio are worth paying attention to. Lots of attention. I have already talked about Anheuser-Busch and Wal-Mart in a previous post and continue to hold both stocks. Buffett increased his Wells Fargo (NYSE: WFC) holding by 50% and Lexmark (NYSE: LXK) by 200%. Lexmark had plunged more than 30% in Q4, when Buffett added to his position, and has almost fully recovered. Also since last September, Berkshire has doubled its Tyco (NYSE: TYC) stake. We have also used recent weakness in the shares to add to our position.

During the latest quarter, Berkshire took new positions in General Electric (NYSE: GE), United Parcel Service (NYSE: UPS), and ConocoPhillips (NYSE: COP). Foreign stock additions to the portfolio include Diageo PLC and Tesco PLC. What all these companies have in common is international revenue exposure. As I noted in a recent post, Mr. Buffett is using this strategy to hedge against further deterioration in the US Dollar. He is probably just getting started. I have been a GE shareholder for almost a decade and would use any weakness in the shares to add to my position in the low $30s. As for ConocoPhillips, it trades at a discount to peers primarily because of the company's aggressive exploration expenditures. Regardless, the new position is an endorsement by Mr. Buffett that high energy prices are here to stay. In energy, I have been a shareholder of Canadian income trusts with exposure to the Oil Sands as well as Encana (NYSE: ECA) and Petro Canada (NYSE: PCZ).

Stay tuned as Mr. Buffett continues to deploy his cash.

Capitalists’ Woodstock

On May 6^th 24,000 people made their pilgrimage to Omaha, Nebraska to take part in the festivities planned around Berkshire Hathaway’s (NYSE: BRKB) annual meeting. Warren Buffett and his partner in crime, Charlie Munger, did not disappoint their disciples. By all accounts, the weekend was as informative and entertaining as would be expected. The highlight for me was the exchange between Buffett and Munger about hedge funds and private equity funds.

“We have so many deal flippers in the game they're going to get in each other's way. How will private equity firms continue to make money by just flipping and flipping and flipping and flipping?” asked Munger.

“They'll make it on fees, fees, fees," quipped Buffett, adding that when he gets a call from a private equity group, he puts the phone down "even faster than Charlie".

Also of note was Berkshire’s announcement of a $4 billion transaction to acquire 80% of Israeli machine tools company, Iscar Metalworking. What is significant about this is that the deal signifies the first major ex-US acquisition for Berkshire. It most definitely will not be the last. Buffett reduced his bet against the US dollar significantly in Q1, but by buying foreign assets he is in essence accomplishing the same thing. More deals will surely follow. He also alluded to a $15 billion transaction in the works but gave it a low probability of closing.

Slowly but surely Buffett is putting his cash to use. While he continues to take significant minority stakes in companies such as Wal-Mart (NYSE: WMT) and Anheuser Busch (NYSE: BUD), his preference is clearly to buy operating companies that fit his investment criteria. Since last year’s acquisition of PacifiCorp, he has put more than $10 billion to work. He also implied that in three years Berkshire will have significantly less cash than today. Indeed, he has suggested Berkshire would like spend more than $15 billion in the energy sector alone. His target seems to be a cash position of $10 billion compared to nearly $40 billion today.

Skeptics continue to question Berkshire’s prospects. They contend Buffett has lost his touch as evident by the cash hoard he carries on the Balance Sheet. Incidentally, Berkshire’s businesses generate $100 to $200 million of cash a week. Not bad. In any case, these skeptics are missing the point. This is value investing at its best. No rush. Patience and discipline are the governing rules. Nobody does it better than Buffett. The whole idea is to be invested in Berkshire before he has deployed the cash. Meanwhile you are safekeeping your cash with the greatest investor of all time. Not to mention the fact that Berkshire is one of a handful of AAA rated companies around (it's also the only AAA rated reinsurer) and a rock solid investment, period. More importantly, the shares remain at least 25% undervalued as book value and earnings power continue to rise. The recent dip in the shares represented a great opportunity to add to holdings.