What Warren Buffett Likes In The Market.

What Warren Buffett Likes In The Market.
February 19th. 2008 - Australasian Investment Review – (AIR)

Warren Buffett has shown where he thinks value is to be found in the US stockmarket: defensives like food and drugs, and surprisingly, a bit of banking.

Buffett made headlines last week with a sharply priced offer to bail out three of the US’s major bond insurers in a deal worth around $US9 billion. It would generate profits of $US3 billion and give his Berkshire Hathaway a dominant 33% stake of the bond insurers’ business in the US, up from nothing at the moment.

He already owns stakes in a number of financial groups such American Express, Well Fargo, Bank of America, M.T. Bank Corp, SunTrust’s Banks and US Bancorp. In a filing late last week with the US Securities and Exchange Commission, revealed that he had topped up his stakes in US Bancorp and Wells Fargo by 2.091 million and 9.590 million shares respectively.

He didn’t lift his stake in Bank Of America, which is probably an important clue as to how he and his company view that bank’s position at the moment.

The bank deals were overshadowed in the SEC filing by the news that Berkshire Hathaway had become the biggest shareholder in US food giant, Kraft, with 8.6% of the issued shares.

Kraft was spun off from the former Phillip Morris group (Now Altria) in 2001 at $US31 a share, which is what it was trading at in New York in Friday after a rise of around 6%.

His acquisitions have been going on for some time. Berkshire says it owns 132.4 million shares of Kraft as of Dec 31, worth $US4.32 billion at the time.

Berkshire had accumulated more than half of the stake by June 30 last year, but had not previously disclosed its investment. Regulators sometimes let Berkshire delay disclosing its purchases so that investors can’t try to copy Buffett, often called the world’s greatest investor, until he’s finished buying.

Analysts said Kraft reflects Buffett’s preference for brand-name companies with solid businesses, but which may be out of favor. Kraft products include Maxwell House coffee, Oreo cookies and Oscar Mayer deli products, and of course its namesake cheese.

Food has long been a traditional defensive stock for investors in bear markets and Kraft is a giant. But its margins have been battered by rising food costs, especially for dairy products. Drought in Australia and rising demand from Asia has boosted world prices for dairy products, especially from New Zealand which is the world’s biggest exporter.

US dairy prices have risen 40% or more in the past year and that has hit Kraft and other processors hard because they have not been able to lift prices to recover the added costs quickly enough.

The Kraft buy means that Buffett’s companies are now one of the largest investors in food and consumer products companies in the world.

Berkshire also owns large stakes in other consumer products companies; including Coca-Cola Co and Procter & Gamble Co. P&G is the world’s biggest consumer products company.

The move deeper into banking is an interesting call by Buffett and Berkshire Hathaway company and its collection of insurance companies because banking and financial companies have been pummeled by the imploding US housing sector because of the sub prime debacle and credit crunch.

He didn’t add to the stakes in American Express and Bank of America. Buffett has often said that he is impressed with Wells Fargo’s management and that bank seems to be riding out the sub prime crisis better. It had low exposure and although its home base of California is the worst affected housing market in the US, it has strong shares in other states and in better quality home lending.

Buffett’s desire to move deeper into financial holdings is an interesting read on the outlook for the US economy: he is a value investor and often buys when he thinks stocks are ‘cheap’ according to old fashioned investment analysis precepts of book value versus market value.

In last week’s SECs filing, Berkshire also revealed a $76.1 million stake in two major European drug groups.

Berkshire Hathaway said it had bought 1.5m shares in GlaxoSmithKline for $US76.1 million and another 3.6 million American Depository Receipts in French drug group Sanofi-Aventis.

That followed investments in several health-care companies over the last year, including drugmakers Johnson & Johnson and Sanofi-Aventis and the insurers united health Group Inc and WellPoint Inc.

The news helped lift GSK’s shares last week. They have fallen by a quarter in the past year: they have been undermined recently been hit after Jean-Pierre Garnier, GSK’s outgoing chief executive, warned last week of a single mid-digit decline in earnings during 2008 on the back of increasing generic competition and problems with several newish drugs.

The move to lift his stakes in the two banks was overlooked by US and European media and analysts, just as was his decision to buy another 7.847 million shares in Burlington Northern, one of the US major railroads. Berkshire now has 60.8 million Burlington shares, as well as a small stake in rival Norfolk Southern.

This article is contributed by Australasian Investment Review – (AIR) You can subscribe for their free newsletter at www.aireview.com.au

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