Buffett Just Bought Over $50 Million of This Stock

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) released its latest 13-F filing with the Securities and Exchange Commission (SEC) on Monday, May 16, to detail its stock portfolio holdings as of the end of the first quarter. The release is highly-anticipated each quarter and, though the first quarter ended more than six weeks ago, it offers the timeliest way to see which stocks Warren Buffett bought, sold or held during the 12-week period.

The latest twist at Berkshire is that Warren Buffett hired 39 year-old Todd Combs from CastlePoint Capital Management back in October 2010 to help him manage Berkshire’s $53.6 billion portfolio. As such, this represented the first full quarter in which Combs’ picks will be commingled with Buffett’s. Previously, Lou Simpson from Berkshire insurance subsidiary Geico had picks that showed up in Berkshire’s quarterly filing, but Simpson retired in August 2010 at the age of 73.

#-ad_banner-#Only three stock trades took place during Berkshire’s first quarter. The first consisted of a sale of integrated energy firm ConocoPhillips (NYSE: COP), which Buffett has been steadily selling off over since an admitted bad call on his part when he started acquiring shares in 2008, when oil hit all-time highs of more than $140 a barrel. Oil declined rapidly along with the explosion of the financial crisis, and many oil firms remain well off their 2008 highs. Conoco traded at more than $90 per share in June 2008 and can be had currently for close to $70 a share.

The second transaction could be significant, but there is simply no way for investors to find out. This is because the recent filing states that “confidential information has been omitted from the Form 13F and filed separately with the Commission.” Given Buffett’s market-moving abilities, he has a unique and special arrangement with the SEC to keep certain positions close to his chest while he is building them.

The only purchase during the quarter consisted of credit card firm MasterCard (NYSE: MA). Berkshire acquired 216,000 shares at some point between January and March and ended the first quarter with a total position size of $54.4 million and average cost of close to $252 per share. The call has already proven a winner — the stock is up close to 11% from Berkshire’s average purchase price.

The first thing that stands out is the position is quite a small, 0.1% of Berkshire’s overall portfolio. This makes it likely that this represents what is likely Combs’ first purchase for Berkshire, and is further supported by the fact that he held the stock in the portfolio he was managing while at CastlePoint. Investors are obviously in the early stages of getting comfortable with Comb’s recommendations, but it’s reasonable to conclude that the MasterCard purchase was approved by Buffett and discussed in detail while the position was being purchased. [My colleague David Sterman recently discussed Buffett’s investment approach and what he has learned from the Oracle of Omaha’s annual letter]

The MasterCard purchase was indeed timely, as industry uncertainty was high because the Dodd-Frank financial reform legislation that was enacted on July 21 contains a provision to regulate transaction fees that credit card companies charge retailers for the right to use their cards. MasterCard is the second-largest credit card brand in the world, with an estimated 31% of the market. This is behind archrival Visa (NYSE: V), at about 63%. Given they both control more than 90% of the market, they are the most likely to be adversely affected by restrictions on what credit card firms can charge their customers.

Government price control concerns have subsided for the time being, which explains a good part of the strong stock performance MasterCard has had so far this year. Based on sales of $5.7 billion during the past year, MasterCard can grow much faster than Visa, which reported sales of $8.6 billion during the same period. MasterCard’s returns on invested capital (ROIC), an important metric that Buffett tracks, is more than 40% during the past 12 months, well above Visa’s 13%. 
Action to Take –> MasterCard has a very appealing business model and growth prospects, but its stock is bumping up against its 52-week highs and could take a breather from its rapid run up. This has made Berkshire’s purchase look particularly timely, and it won’t be until well after the end of the second quarter before investors will be able to find out whether the company added to its stake between April and June. I don’t ever recommend someone to buy a stock just because Buffett did. Even he makes mistakes (see: ConocoPhillips). Besides, this relatively paltry transaction could simply be a test-run for the newly-hired Combs. Having said that, this latest buy looks like one that might be worth following.

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