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A Bounty of Ideas from Berkshire's Portfolio -- Page 2

A look at Berkshire's 5-star holdings.

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Berkshire's 5-Star Stocks
Presently, our analysts at Morningstar believe that 12 of Berkshire's stocks are attractively valued enough to earn our 5-star rating as of Aug. 15. Even better, I've also included three of these stocks in The Ultimate Stock-Picker's Portfolio, as several other like-minded investors also share my views on  American Express (AXP),  Wal-Mart (WMT), and  Johnson & Johnson (JNJ). Without further ado, here are the 12 best ideas from Berkshire's portfolio based on Morningstar's rating for stocks:

My colleague Michael Kon recently wrote about Amex, "American Express has a fantastic business model and is poised for continued success. We think the firm's late 2005 spin-off of its advisory unit,  Ameriprise Financial (AMP), has allowed Amex's flagship card-related business to really shine in 2006, and we expect a very bright future."

Ganesh Rathnam recently commented on  B of A's  (BAC) latest acquisition, "We are thrilled with Bank of America's proposed purchase of LaSalle bank. We believe LaSalle will be worth a lot more under the B of A umbrella than its $21 billion purchase price. B of A expects to close the acquisition in the fourth quarter, and we estimate it will take as long as a year for the bank to bring LaSalle's sky-high expense ratio in line with its own. Nonetheless, we remain confident that B of A will accomplish that goal, now that it is a veteran integrator of large acquisitions. We believe the market is offering a tremendous discount for the shares of this giant."

Morningstar analyst Brady Lemos recently remarked on  Home Depot's (HD) second-quarter earnings, "Home Depot reported second-quarter results that were in line with our estimates, and we are maintaining our fair value estimate. As expected, sales at the home-improvement retailer were hurt by the slowing domestic housing market; same-store sales fell 5% in the period. We think the housing market will remain challenging through 2007 and into 2008, yet we are comfortable with our long-term revenue growth and profitability assumptions. In our opinion, Home Depot is well positioned to emerge from this cyclical downturn as a more dominant force in the home-improvement market."

Like Home Depot, Lemos believes competitor  Lowe's (LOW) is attractively valued as well, recently commenting, "While housing market worries could pressure sales over the next few quarters, we like Lowe's long-term prospects and expect the retailer to continue to gain share of the fragmented home-improvement market. We believe Lowe's can leverage its industry-leading customer service, shopper-friendly stores, and proven business model to profitably expand domestically and abroad."

Heather Brilliant recently said about Johnson & Johnson, "J&J is unique among pharmaceutical firms in that more than half of its revenue comes from other areas, namely medical devices and consumer health-care products. We expect these businesses will grow faster than the firm's pharmaceutical division in the coming years, and will therefore increase as a proportion of J&J's revenues and profits. Businesses, such as orthopedic device maker DePuy and minimally invasive surgery division Ethicon Endo-Surgery, continue to develop innovative products and lead their respective markets."

My colleague Michael Corty recently commented on the perceived risk in his 5-star call on  Moody's (MCO), saying, "We think that Moody's (and other credit-rating firms) will continue to face 'headline risk' due to losses suffered in the subprime mortgage market. It's likely that Moody's will face litigation from parties claiming damages related to its rating actions, in particular, the company's ratings on residential-mortgage-backed securities and related credit derivative products. Moody's has been downgrading its ratings on certain RMBS and CDO issuances, and we think it's likely that additional downgrades will continue as its initial ratings are proving to be too optimistic. It's our understanding that the firm's rating methodology did not correctly anticipate the impact of a decline in residential housing prices."

Morningstar analyst Lauren DeSanto recently said about  Procter & Gamble's (PG) brands, "P&G has an unparalleled skill with brands. It has 22 brands that realize more than $1 billion in annual sales and another 16 brands that rack up more than $500 million per year. The firm's brand equities are so strong that P&G is often the price leader in its categories with brands that hit a value-added, slightly aspirational, premium-priced, sweet spot with consumers. There are competitors that challenge P&G in specific categories, particularly  Colgate-Palmolive (CL) in toothpaste and L'Oreal (LRLCY) in beauty care, but no other company can hold a candle to the firm's entire product portfolio. More importantly, P&G possesses an amazing ability to reinvent its brands, whether resuscitating Olay, repositioning Old Spice, or boosting Tide by combining it with Downy."

Heather Brilliant wrote about  Sanofi-Aventis(SNY) business, "Sanofi is the product of many mergers, most recently that of French drug powerhouses Sanofi-Synthelabo and Aventis. The firm boasts an enviable product portfolio of drugs that are leaders in their respective markets, including Lovenox for preventing blood clots, sleep aid Ambien, and oncology drugs Eloxatin and Taxotere. Sanofi has also established itself as one of the largest providers of vaccines, a business that has experienced tremendous growth in recent years."

My colleague Ryan Lentell is encouraged by  US Bancorp's (USB) willingness to return capital to shareholders, recently writing, "We admire management's goal of returning at least 80% of earnings to shareholders annually, achieving 10% long-term earnings per share growth, and maintaining returns on equity above 20%. We think these significant self-imposed hurdles are shareholder-friendly, and achieving them should create shareholder value. In our opinion, the firm's efficient and diversified franchise is the key to its consistently strong financial results. Today, almost 50% of US Bancorp's revenue is non-interest-related, reducing its interest rate sensitivity."

Morningstar analyst Parrish Glover recently wrote about  USG's  business, "Even with the strength of USG's brands and distribution, the business remains highly cyclical, with revenue closely tied to booms and busts in commercial, industrial, or residential construction. USG is able to obtain price premiums on wallboard during hot periods, but it must scale prices back when building slows. However, while price volatility leads to choppiness in short-term results, return on invested capital over the long run has averaged 15%, well in excess of the company's cost of capital."

Joseph Beaulieu provided his most recent take on Wal-Mart after its second-quarter earnings release: "Wal-Mart Stores' second-quarter results showed that the company is struggling with slowing spending from its core customers and with its apparel merchandising. We've adjusted our revenue and margin estimates to reflect expectations for a weaker second half of the year and a weaker 2008, but this doesn't have a significant impact on our fair value estimate. However, if same-store sales turn negative over a couple of quarters, we think the deleveraging of fixed costs would result in a significant margin decline, and we'd be likely to cut our fair value estimate."

I continue to believe Berkshire's 80% owned subsidiary  Wesco Financial  remains a compelling bargain, recently writing, "Berkshire Hathaway's 80%-owned subsidiary, Wesco Financial, recently reported first-quarter results that were somewhat consistent with our expectations. We're sticking with our fair value estimate. Wesco's results were driven by higher investment income, which climbed by more than 16% from the prior-year period, thanks to higher short-term interest rates. Wesco's insurance operations also showed better-than-forecasted results, though we note that the third quarter is typically the heaviest for insurance claims, so we're sticking with our extant assumptions for these businesses. So far this year Wesco's book value per share is up only around 2%, to $344 per share as of June 30. We don't foresee any huge jumps in book value, at least until management can begin to deploy some of Wesco's growing cash hoard--which now approximates $1.27 billion--into new investments."

Despite regulatory risks, Morningstar analyst Brett Horn continues to have a favorable view on  Western Union (WU), commenting in his latest Analyst Report, "Western Union's second-quarter results were about on par with our expectations, so we are maintaining our fair value estimate. Revenue grew 8%, with tough conditions in the U.S.-Mexico corridor continuing to weigh on the company's results. The operating margin fell from 29% to 27%, but this was largely due to incremental costs associated with operating as a stand-alone entity. The immigration debate and the slowdown in the construction industry are still creating softness in the U.S.-Mexico corridor. Through pricing decreases, Western Union was able to achieve 5% transaction growth along this corridor. However, revenue still dropped 7%. Offsetting this decline was solid growth in money transfers to other countries, which increased 20%. While short-term trends have made for a difficult operating environment, we take some comfort from Western Union's solid cash-flow generation. The company produced almost $500 million in operating cash flow in the first half of 2007 and expects to generate $1 billion for the year."

The Full Portfolio
I've included Berkshire's full portfolio below, including a few of the international names that Berkshire listed in its annual report last year. And if you haven't already done so, please be sure to sign up for my free e-mail alerts about The Ultimate Stock-Picker's Portfolio to continue to receive the top picks from Berkshire's portfolio as well as several other well-respected managers' holdings. Also, stay on the lookout for additional video interviews from me. (Those of you who subscribe to my free e-mail alerts will receive the full-length unabridged versions of my video interviews, where I discuss several more stock ideas with each investment manager.)

So, without further delay, here is Berkshire's full portfolio:

 The Berkshire Hathaway Portfolio
American Express (AXP)
American Standard Cos. 
Ameriprise Financial (AMP)
Anheuser-Busch (BUD)
Bank of America (BAC)
Burlington Northern 
Coca-Cola (KO)
Comcast CMCSA 
Comdisco  Not Rated
ConocoPhillips (COP)
Costco Wholesale (COST)
Dow Jones 
First Data 
Gannett (GCI) Under Review
General Electric (GE)
Home Depot (HD)
Ingersoll-Rand (IR)
Iron Mountain (IRM)
Johnson & Johnson (JNJ)
Lowe's Companies (LOW)
M&T Bank (MTB)
Moody's (MCO)
Nike (NKE)
Posco (PKX)
Procter & Gamble (PG)
Sanofi-Aventis (SNY)
ServiceMaster  Under Review
SunTrust Banks 
Tesco PLC Not Rated
Torchmark (TMK)
Tyco International 
US Bancorp (USB)
UnitedHealth Group (UNH)
United Parcel Service (UPS)
Wal-Mart Stores (WMT)
Washington Post (WPO) Under Review
Wells Fargo (WFC)
WellPoint (WLP)
Wesco Financial 
Western Union (WU)
White Mountains (WTM)
Ratings as of 08-15-07

Justin Fuller has a position in the following securities mentioned above: AXP, PG, HD, WU, GE. Find out about Morningstar’s editorial policies.