UK Markets close in 3 hrs 17 mins

Warren Buffett's Portfolio Yields a Big Surprise

Sean Williams, The Motley Fool

Warren Buffett is arguably the greatest investor of our time. With roughly $10,000 in hand in the mid-1950s, the Oracle of Omaha has grown that initial nest egg into a net worth that now exceeds $79 billion. And, as I've noted before, if not for his philanthropic contributions over the decades, he just might be the wealthiest man in the world right now.

What makes Buffett's success so interesting is that he isn't trying to reinvent how to invest. Rather, he seeks out companies that have clear competitive advantages and, often, a long history of profitability. Essentially, these are companies that he could buy and forget about for years or decades at a time. It's an investment strategy that might bore the daylights out of some investors who enjoy the heart-pounding tick of the Dow Jones Industrial Average up or down a fraction of a percent, but it works for him. In fact, averaged out over many decades, Buffett's book value growth for Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), the company he runs as CEO, has absolutely thumped the S&P 500.

Berkshire Hathaway CEO Warren Buffett speaking with reporters at the company's annual stockholder meeting.

Berkshire Hathaway CEO Warren Buffett speaking with reporters at the company's annual stockholder meeting. Image source: The Motley Fool.

Berkshire Hathaway's 13F filing yields some familiar buying

Because of this overwhelming success, investors often look to Buffett for investment ideas and may even mirror his every move. That's what makes Berkshire Hathaway's 13F filing with the Securities and Exchange Commission (SEC) each quarter such an anticipated event.

You see, investment firms that have more than $100 million in assets under management are required to file Form 13F with the SEC no later than 45 days after the end of the previous quarter. This filing will contain all of an investment firm's holdings, thereby allowing Wall Street and investors to see what the brightest investment minds have been up to over the previous three-month period. Even though there are downfalls to 13Fs, such as the fact that they're showing data that's more than six weeks old, they can still provide valuable insight as to what trends, sectors, and industries are dominating the attention of the most prominent money managers on Wall Street.

Last week, Berkshire Hathaway filed its latest 13F, which covers any transactions that occurred during the second quarter (April 1-June 30, 2019). There were two notable additions in the finance space, with Buffett and/or his team adding to Berkshire's existing positions in Bank of America (NYSE: BAC) and U.S. Bancorp (NYSE: USB). Berkshire has held stock in U.S. Bancorp for 13 years and counting. 

The addition of nearly 31.1 million shares of Bank of America and almost 3.2 million shares of U.S. Bancorp fits with Buffett's theme of bolstering Berkshire's portfolio with well-run, nationally branded financial institutions. Bank of America has, in particular, done an excellent job of reducing its operating expenses since the Great Recession, and it's benefited from the move higher in interest rates. Meanwhile, U.S. Bancorp has one of the higher returns on assets among major banks.

A hand holding a magnifying glass over a financial newspaper.

Image source: Getty Images.

The biggest surprise in Berkshire's latest filing

However, what has to be the biggest surprise in Berkshire Hathaway's latest filing is that Buffett and his team didn't do a thing with two of the biggest portfolio drags: Teva Pharmaceutical Industries (NYSE: TEVA) and Kraft Heinz (NASDAQ: KHC).

Teva Pharmaceutical, which was first added to the Berkshire Hathaway portfolio -- by someone other than Buffett – during the fourth quarter of 2017, and was subsequently added to in 2018, has lost more than three-quarters of its value over the trailing 12 months. Recently, Teva has been hammered by opioid lawsuits and the unknown liability it could face from those lawsuits, as well as a multitude of factors that have built up over the past couple of years, including generic-drug pricing weakness, a bribery settlement, the halting of its dividend, and a large debt load.

Meanwhile, Kraft Heinz has been nothing short of a disaster. Following a $15.4 billion writedown on goodwill associated with a number of marquee brands, Kraft Heinz followed up with equally dismal first-half operating results on Aug. 8. Revenue in the first half of the year has fallen 4.8%, hurt by both promotional timing and price reductions, with adjusted profits falling by more than 50%. Kraft Heinz has a tough task ahead of it to ignite interest in its core brands, all while attempting to whittle away an enormous amount of long-term debt ($29.8 billion) and goodwill ($36 billion) that remains on its balance sheet. 

A businessman holding a stack of cash behind his back, with his fingers crossed.

Image source: Getty Images.

Holding out hope?

For what it's worth, Buffett has admitted that Berkshire Hathaway overpaid for its stake in Kraft Heinz. However, he has also been adamant that Berkshire Hathaway would stand by its position. Of course, this decision is being made more out of necessity than anything else. 

You see, the 325.6 million shares that Berkshire Hathaway owns of Kraft Heinz stock represents 26.69% of the company's outstanding shares at the end of the second quarter. There's not really an effective way for Berkshire to sell down this position without negatively impacting Kraft Heinz's share price. Plus, Buffett does believe in the brands that Kraft Heinz owns in its portfolio.

As for Teva, the decision to hold could be based partly on valuation -- Teva trades at less than three times 2019 and 2020 earnings per share -- as well as an overreaction to the ongoing opioid lawsuits. Even if these lawsuits do result in a judgment against Teva, the company's liability would be amortized over many years, and it shouldn't be anywhere near as crippling as the recent share price movement would suggest. Then again, this decision might not be made by Buffett, with other members of his team appearing to call the shots on Teva.

While Buffett's buys and sells are always a hot-button topic, the second quarter was more about what Buffett didn't do.


Sean Williams owns shares of Bank of America and Teva Pharmaceutical Industries. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

This article was originally published on Fool.com