Editor's note: As has been widely reported, Warren Buffett this morning (August 25) announced plans to invest $5 billion in Bank of America (NYSE: BAC). According to reports, Buffett will buy 50,000 preferred shares paying a 6% annual dividend. This development, along with the recent move to purchase more shares of Wells Fargo (WFC: NYSE), as detailed by Ryan Fuhrmann below, illustrates Buffett's contrarian bent, as financials led the market lower in the most recent market downturn. Bank of America led the pack, losing about 38% since July 22. Financials have been roundly spurned since Lehman Brothers collapsed in 2008, yet Buffett seems to be sending clear signals that despite some strong headwinds for the financial industry, he thinks there are significant deals to be had.
Every value investor knows Warren Buffett is one of the most successful investors to have ever lived. Many market observers track his portfolio actions in order to gain insight into whether Buffett is still bullish -- or has perhaps turned bearish -- on holdings in his $52.4 billion portfolio. So when his conglomerate Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) releases its 13-F filing with the Securities and Exchange Commission (SEC), investors like to pay close attention. On Monday, Aug. 15, when Berkshire released its second quarter 2011 13-F, it was no different.
There were only four notable position changes during the second quarter. This included reducing a position, adding to two existing ones, and establishing an entirely new one. It's believed Combs was a primary driver behind two of the four moves.
Specifically, Berkshire reduced its stake in food giant Kraft (NYSE: KFT) by an estimated 5% to 99.5 million . This left Kraft's total at about $3.4 billion, or roughly 6.6% of Berkshire's total investment portfolio. Buffett was highly critical of Kraft's purchase of Cadbury, which completed back in February 2010, and is probably why he's unloading shares.
Despite his reservations, Kraft's stock has performed well since the deal was made. It has been up more than 20%, or roughly double the market's return of 10% during this 18-month period. If Berkshire sold later in the second quarter, then it likely locked in gains while Kraft was near its five-year highs. In other words, the sale represented an opportunity to free up capital and invest in more beaten-down stocks.
Banking giant Wells Fargo (NYSE: WFC) remained high on Buffett's contrarian shopping list during the second quarter. Berkshire bought 9.7 million more shares of Wells Fargo during the quarter to bring the position to close to $10 billion, or a whopping 19% of the portfolio. Berkshire continues to be Wells Fargo's largest shareholder, owning roughly 7.5% of the company.
Back in April 2009, just as the stock market was bottoming out from the credit crisis, Buffett told Fortune Magazine why he liked Wells Fargo. He commended the bank's management for largely avoiding theloans that ruined many large rivals. He also pointed out the bank acquired Wachovia for a song and would likely continue to boost total returns as Wachovia branches were converted to the Wells name and culture. Finally, he said Wells Fargo considers its bank branches retail stores that focus on selling banking services, insurance, mortgages and related financial services.
The final two purchases are rumored to be Combs' decision. First, he nearly doubled his position in credit-card giant MasterCard (NYSE: MA) to bring the total position size to 405,000 shares, or $122 million as of the end of the second quarter. Berkshire took an initial stake in MasterCard in the first quarter, when it bought 216,000 shares for $54.4 million. Even though a small position size of only about 2.3% by Berkshire's standards (Buffett has a reputation for taking very large sizes in companies he admires), the deal looks especially timely because MasterCard's stock has risen steadily so far this year (it's up 36% since January) and, at about $300 a share, is currently trading near its highs of the past year.
Finally, Combs established a position in discount retailer Dollar General (NYSE: DG). Like MasterCard, the position is quite small at only 1% of the portfolio and serves to indicate Combs is still earning Buffett's confidence. If the position was purchased earlier in the second quarter, then it could have made money for Berkshire. The stock trended up as the quarter ended and has recently fallen back to around $32 per share. However, Berkshire invests for the long-term, so it could take at least a couple of years for the position to really pay off.
Action to Take -> The actions of the Oracle of Omaha have usually proved to be sensible. And in this vulnerable stock market, being sensible is vital. The 5.5% reduction in Kraft looked timely and allowed Berkshire to shift funds to more compelling stocks like Wells Fargo. The stock is one both David Sterman and I have been high on recently. [Go here to read my friend Dave's most recent analysis of why it's a good buy.] Given Buffett's additional purchases and the fact that the share price remains low, I see the stock as a good buying opportunity.