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3 buys in Berkshire Hathaway's portfolio

Susan Dziubinski  |  20 May 2020Text size  Decrease  Increase  |  
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Last week, Berkshire Hathaway (BRK.A)/(BRK.B) released its first-quarter 13-F. Morningstar's resident Berkshire specialist, Gregg Warren, noted that the behemoth has been a net seller of equities this year.

True, Berkshire picked up shares of PNC Financial (PNC). But it trimmed back elsewhere in the portfolio, "all of which seemed to be more moves on the part of Todd Combs and Ted Weschler to either take some profit off the table or derisk parts of their portfolios," says Warren.

Moreover, Warren Buffett revealed during Berkshire's virtual annual meeting that the team had sold its entire airline stake in April and has ample cash on hand.

Given the market downdraft, there are plenty of bargains to be found among Berkshire's portfolio holdings. Today we're taking a closer look at three of them.

 

American Express (AXP)

Morningstar Rating (as of May 15, 2020): 5 stars

Economic Moat Rating: Wide

Berkshire owns about 18 per cent of American Express' stock. Amex runs a highly profitable merchant payment network and operates in three segments: global consumer services, global commercial services, and global merchant and network services. Morningstar added the stock to its Wide Moat Focus Index in its latest reconstitution, and Amex is one of our top picks in the financial-services sector this quarter. 

"We believe wide-moat American Express' resilient business model and attractive valuation offers investors a margin of safety in this turbulent economic environment," says analyst Colin Plunkett in a recent analyst note.

Plunkett explains that Amex, like most other companies, will struggle this year as a result of the novel coronavirus pandemic. We expect a significant rebound once consumers and business travelers resume spending, he adds. We therefore don't think short-term challenges will impair the firm's wide moat nor our outlook. 

"Long-term, we still anticipate American Express' greatest challenge will be adapting to the evolving technological landscape in payments while targeting a new generation of millennial consumers who don't place as much importance on Amex's brand when selecting a credit card," he argues.

Trading at a 30 per cent-plus discount to our fair value estimate as of this writing, shares are a bargain.

 

Coca-Cola (KO) 

Morningstar Rating (as of May 15, 2020): 4 stars

Economic Moat Rating: Wide

Berkshire owns more than 9 per cent of Coke's stock. The wide-moat company boasts a fortresslike balance sheet, and analyst Nicholas Johnson calls it "a high-quality play in this precarious economic environment." 

Of course, the firm isn't immune to the global uncertainty wrought by the coronavirus crisis.

"Despite solid first-quarter results (top and bottom lines beat CapIQ consensus), management opted against issuing formal guidance, and its commentary seemed to portend a pretty ugly second quarter," reports Johnson. "Nevertheless, we remain confident in the Coca-Cola system's strategic advantage and believe the right tactical competencies are in place to allow the firm to navigate disparate dynamics across its territories."

Indeed, in the longer term we expect beverages to grow as a proportion of the company's total product mix, with water and ready-to-drink coffee propelling growth. We see outsize growth for the firm's global ventures, adds Johnson. Last, we think Coke's moat trend is stable and management has been an exemplary steward of shareholder capital.

Trading at 4-star levels as of this writing, Coke is undervalued.

 

US Bancorp (USB)

Morningstar Rating (as of May 15, 2020): 4 stars

Economic Moat Rating: Wide

Berkshire owns about 8 per cent of US Bancorp's stock. The bank was recently added to the Morningstar Wide Moat Index and is one of many high-quality financial services names trading at a discount to our fair value estimate. We think it offers investors a compelling combination of upside and quality.

"US Bancorp is one of the strongest and best-run regional banks we cover," argues analyst Eric Compton. "Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. US Bancorp's exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company's positioning for the future."

The bank boasts a diversified balance sheet, and we think its management is among the best in the business, awarding the bank an exemplary stewardship rating. Management's proven acumen will come in handy as the current credit environment becomes more difficult for the banking industry. 

Trading at a 30 per cent-plus discount to our fair value estimate, shares are undervalued in our eyes.

 Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

 See also Morningstar Guide to International Investing

is director of content for Morningstar.com.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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