Billionaire investor Warren Buffett has a reputation as one of the most successful investors of all time. His feat of growing book value at Berkshire Hathaway (NYSE: BRK-B) by 20% annually will likely go down as the longest and most impressive strings of wealth creation in history.
But the run is far from over.
Investors received insight into Buffett's latest moves with Berkshire's fourth-quarter 2011 filing, which was just released this week. Below are the five most important things you should know about his latest moves.
1. A fierce loyalty to Wells Fargo
Buffett has steadily increased his stake in banking giant Wells Fargo (NYSE: WFC) over the years, and Berkshire is now the largest shareholder in the bank. In fact, he has practically bought at any chance he gets, especially since the credit crisis, believing the severe downturn has done little to impair the solid growth potential and earnings power of Wells in the long term.
During the fourth quarter, he added more than 3.9 million shares to his stockpile to bring his total holdings to roughly 383.7 million shares. That works out to about $10.5 billion, or 6.5% of Wells Fargo's current market capitalization of $160 billion.
In a 2009 interview with CNNMoney, Buffett detailed just what he liked about Wells. He particularly liked that "they get their money cheaper than anybody else." Because of Wells' stellar reputation, clients are OK with being paid a lower interest rate on their checking and savings deposits. This means a bigger spread when it earns interest from loaning these funds back to other individuals and businesses. He also pointed out they did less dumb things during the credit crisis, which allowed them to easily survive and acquire archrival Wachovia for pennies on the dollar. Finally, he loves Wells' earnings power and the fact they consider their bank branches retail stores to make loans, sell credit cards, brokerage services, insurance and just about any other financial service.
2. A huge commitment to DirectTV
Digital television provider DirectTV (NYSE: DTV) is a very new position for Berkshire. It is also one he bought aggressively during the fourth quarter. The stake was valued at nearly $900 million to end the year, a relatively small holding for Berkshire, but the position quadrupled in size from 4.2 million shares to 20.3 million shares. The buy is being attributed to Buffett lieutenant Ted Weschler, who held sizeable stakes in a number of media companies when he ran Peninsula Capital. Berkshire hired Weschler near the end of last year.
DirecTV has grown into a financial powerhouse by simply selling subscription television. Like Buffett with Wells Fargo, customers have grown fiercely loyal to DirectTV. This stems from extremely savvy programming moves, including NFL Sunday Ticket, high definition channels, and on-demand movies that are available sooner than at rivals such as Netflix (Nasdaq: NFLX).
DirecTV has grown sales and profits by about 13% each year for the past decade. With the increased position, Berkshire clearly expects more of the same and is comfortable with it being able to sustain its competitive position.
3. A new stake in a Buffett-like track record
Weschler also likely turned Buffett on to Liberty Media (Nasdaq: LMCA), one of the new positions held during the quarter. Berkshire acquired 1.7 million shares (currently worth about $132.7 million) for an estimated total ownership of 1.5% of the company.
Liberty is controlled by media mogul John Malone, who has a track record that rivals Berkshire in terms of rapid wealth creation over the years. Liberty owns and invests in a wide array of media and entertainment assets, including the Atlanta Braves professional baseball team, SiriusXM radio (Nasdaq: SIRI), concert producer Live Nation (NYSE: LYV), Barnes & Noble (NYSE: BN), Time Warner (NYSE: TWC), and Viacom (NYSE: VIA).
Growth hasn't been as solid at Liberty, but the value of its assets is undeniable. Buffett was likely sold on the low value the market is ascribing to these assets, namely, price-to-cash flow, which is roughly 5.5 and well below the peer average of 7 to 8.
4. Another notable wide-moat purchase
Berkshire established a new 2.7 million share position (worth more than $200 million) in DaVita (NYSE: DVA), which runs dialysis centers across the United States. New manager Todd Combs is believed to be behind the move. Berkshire acquired 2.7 million shares for a stake worth more than $200 million as of quarter end.
Buffett loves economic moats, or businesses that have competitive advantages that rivals are unlikely to surmount. DaVita fits this bill in that it has an estimated market share of 30%. Additionally, patients need dialysis regardless of whether the economy is booming or in recession. In other words, it has great downside protection. Better yet, the business is growing robustly: sales have increased 17% annually in the past five years.
5. Other notable moves
Buffett also acquired additional shares in International Business Machines (NYSE: IBM), which is a relatively new position that he has purchased aggressively. He ended the year with 63.9 million shares at a market value of nearly $12 billion.
He also boosted his stakes in Intel (Nasdaq: INTC), Visa (NYSE: V), CVS Caremark (NYSE: CVS) and General Dynamics (NYSE: GD). Notable sales include the complete liquidation of Exxon Mobil (NYSE: XOM) and lower stakes in Kraft (NYSE: KFT) and Johnson & Johnson (NYSE: JNJ).
Action to Take --> If you want the upside of owning the beaten-down financial sector but want a degree of safety from a relatively conservative holding, then Wells Fargo appears to be a very solid way to go. DirecTV continues to prove it is a cash flow powerhouse, and there is little reason to see why it wouldn't be a good idea to ride Buffett's coattails on this one. The same goes for the other notable buys of Liberty Media and DaVita. And while Buffett may not have bought these two stocks directly, they were bought by advisors that Warren clearly trusts with access to his empire.