The Oracle has spoken.
Fresh on the heels of his recent $44 billion deal to buy the railroad Burlington Northern Santa Fe, Warren Buffett's latest filing with the Securities and Exchange Commission Monday night shows his company, Berkshire Hathaway (NYSE: BRK-B), has acquired new stakes in Exxon Mobil (NYSE: XOM), food giant Nestle (Pink: NSRGF) and trash hauler Republic Services (NYSE: RSG).
Buffett's stake in Exxon, about 1.28 million shares, is worth about $95 million, while the Nestle shares are valued at slightly more than $160 million. That's pocket change to Berkshire. The Wells stake, however, is significantly larger: 313.4 million shares worth $8.9 billion, or about 16% of Berkshire's $56.5 billion cache of equities.
According to the third-quarter filing, Buffett reduced his holdings of the utility NPG Energy (NYSE: NPG), petroleum giant Conoco Phillips (NYSE: COP) -- a pick he characterized earlier this year as "a major mistake" -- and health insurer WellPoint (NYSE: WLP).
The SEC filing, which Buffett makes quarterly to detail his holdings, showed no trace of Eaton Corp. (NYSE: ETN), of which Berkshire had held two million shares last quarter. Buffett also cut his stake in SunTrust Bank (NYSE: STI), and previous filings indicated that Buffett has been easing away from Moody's (NYSE: MCO), a portfolio favorite for its wide economic moat that has nevertheless come under widespread scrutiny for the role its ratings played in the financial crisis.
That's the Buffett news. Here are three points the market is missing:
1. The Connections
Buffett invests with, works with and listens to his old friends. Walter Scott, for example, is a hometown neighbor who now sits on Berkshire's board and helps run its utility business. (It was Scott who in 1986 told Buffett it was OK to buy a private jet.) Charlie Munger, whom Buffett met through another friend at the Omaha Club in 1959, has become his "alter ego" and has been behind some of Berkshire's's notable deals, including See's Candy and BYD. Many of Berkshire's deals can be traced to information from a relatively small circle of smart, like-minded, plainspoken Midwesterners.
With one notable exception: Bill Gates.
Gates and Buffett are close friends who share a devotion to bridge. Gates also sits on the Berkshire board, and Buffett has pledged his fortune to the Bill & Melinda Gates Foundation.
This is why Buffett's recent addition of Republic Services wasn't so surprising. Not only does the Gates Foundation own this stock, but Gates himself is a major shareholder. Cascade Investments, Gates' personal hedge fund, owns nearly 20% of the $10 billion trash company.
If you're wondering what other companies Gates owns that he might be talking to Buffett about while they play cards, check out “will offer only "a tax benefit," a nice way of saying "a huge capital loss from buying high and selling low."
Now Buffett seems eager to redeem himself. This time he's picked a winner.
Exxon Mobil knows that the secret in the oil business isn't price, it's cost. Exxon's grasp of this is one of the things that has always made this company attractive.
If an oil company can't strictly manage the expenses of extracting energy, then it doesn't matter what crude or natural gas is selling for -- the company will always spend to the break-even point. This may lead to productive wells but not necessarily profitable ones. The wildcatting days of the "awl bidness," when the geologist picked a spot, the tool pusher dug the well and the investors waited for returns are over. Today, the break-even point is static, not fluid. Petroleum companies aren't about managing risk, they're about successful project execution.
Such excellent, disciplined management is why ExxonMobil is a clear Buffett pick. He loves capable managers that can operate cheaply and efficiently. That's certainly Exxon: The company replaces its crude reserves far more cheaply than its rivals can manage. Exxon also completes its projects closer to budget and to deadline than its competitors. In 2008, the company earned $24.67 per oil-equivalent barrel, handily outpacing its peers.
And the stock is cheap. The petroleum-industry leader can be had for about 17.6 times earnings, more than some of its peers but certainly not expensive. Its earnings multiple puts it at a -20% discount to the S&P -- but Exxon has immensely stronger financial wherewithal, a world-beating industry position and obvious managerial prowess. Management is key, Buffett always says, noting that it's the one thing that Berkshire can't supply.
Bottom line: Buffett always likes industry leaders with proven management at a fair price. (The only thing he likes more is to redeem the mistakes he's made.) Exxon Mobil is a bet that the low-cost operator always wins in the end.
3. This Selling Is Reactionary, Not Proactive
Outside of the Gates-related acquisition of Republic Services shares, which I expect Buffett to continue buying, and the Exxon stake, Buffett's moves are reactionary rather than pro-active. They show a chairman trying to protect shareholders from the worst words Buffett ever had to utter: "Our decrease in net worth during 2008 was $11.5 billion," Buffett said in starting off off his annual letter shareholders last year.
Buffett never wants to have a year like 2008 again. He's compounded the net asset value of Berkshire at a +20.2% rate during the past 44 years, a record that will earn him immortality and one that he doesn't want to see tarnished.
So he's getting out of cyclical industrial plays like Eaton and buying companies that sell oil, food and cheap goods. He's buying more of the bank -- Wells Fargo -- that is widely recognized as the industry's best risk manager. He's getting out of the nation's largest health insurer to avert political risk and putting the money to work picking up trash.
Warren Buffett, despite all of his platitudes about an "all-in wager on the future of the American economy," is clearly recession-proofing Berkshire's portfolio by investing in essential noncyclical businesses.
These quarterly moves are reactionary, and that's no way to run a railroad, if you'll pardon the expression. If you must follow Buffett -- by some other venue than owning Berkshire, a stock everyone should own -- then follow him by watching his big deals -- the proactive moves -- not necessarily the purchase of $160 million worth of Nestle.
Bottom line: Never look to Buffett's quarterly filing for portfolio guidance. These actions are no way for an individual investor to build a portfolio, they are simply the way the world's most successful investor manages his.