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Market Update

Berkshire Sells More Legacy Holdings in 3Q

Trading activity picks up with Buffett's two lieutenants, Ted Weschler and Todd Combs.

 Berkshire Hathaway's (BRK.A) (BRK.B) third-quarter 13-F filing, which details the firm's equity holdings, continued to show evidence of the primary theme that we expect to drive portfolio movements over the near to medium term. With Berkshire's appointment of Ted Weschler and Todd Combs as lieutenants to Warren Buffett, the company has been active over the last several quarters selling legacy positions and in the process raising capital for the two managers to invest. 

While a fair amount of the buying activity of late has been initiated by Buffett--with his favorite target continuing to be  Wells Fargo (WFC)--we have seen plenty of trading activity on the part of Weschler and Combs. And while Buffett did make a point during the third quarter of noting that each of these two managers would be working with a "bank" of around $4 billion each (exclusive of any gains/losses on capital that has already been put to work)--up from $1.75 billion each at the end of last year and $2.75 billion each at the end of the first quarter--we think that this amount could rise even higher in the near term, given the amount of selling that has taken place in the portfolio.

Some of the most notable moves in the most recent quarter were sales of legacy positions that can be tied directly to Buffett. Among these were significant sales of shares of  Johnson & Johnson (JNJ),  General Electric (GE),  United Parcel Service (UPS), and Kraft Foods. With regard to Johnson & Johnson, which Berkshire has been selling fairly regularly over the last year, the firm eliminated another 9.8 million shares (equivalent to 95% of the shares that the firm held at the end of the second quarter and worth more than $680 million based on today's closing price for the stock). At this point, Berkshire holds less than 500,000 shares of the health-care firm, and we would not be surprised if the firm eliminated this holding completely before the end of the year (given that it is now one of the smallest positions in Berkshire's equity portfolio). As for General Electric, which we've always ascribed to Lou Simpson, the firm reduced its stake in the company by close to 90% during the third quarter, with less than $15 million left invested in the conglomerate at the end of the period. UPS received similar treatment, with Berkshire eliminating 77% of its stake in the firm, which at less than $5 million was the second-smallest holding in the insurer's portfolio. Meanwhile, the sale of half of its Kraft position was intriguing in that Buffett initiated the trade before the packaged foods giant was set to spin off its grocery operations,  Kraft Foods Group , and rename itself as  Mondelez International (MDLZ), which retained global snack food operations. Having sold off close to 80% of its shares in Kraft over the last several years, we expect Berkshire to continue to whittle down this stake (which is still a top 10 holding at more than $1.2 billion at the end of the third quarter), much like they have with Johnson & Johnson.

Other sales of legacy positions during the quarter included  ConocoPhillips (COP), which was reduced by 16% (or 4.7 million shares),  Procter & Gamble (PG), which was trimmed by more than 10% (with 6.8 million shares sold), and  U.S. Bancorp (USB), which saw a less than 10% reduction (equivalent to 4.7 million shares). While not quite what we would consider to be a legacy position, it was interesting to see Berkshire sell about two thirds of its stake in  Lee Enterprises (LEE), given that the insurer had really only started to build a position in the firm this year. That said, the stock has doubled since the start of the year, partly because Berkshire was taking a stake in the firm, so this could be a move to book some gains, which would mean that this was likely a Combs holdings as opposed to a Buffett purchase (which is what we had originally believed it to be). Combs was also likely behind the sales of  CVS Caremark (CVS),  Dollar General (DG), and  Visa (V), all of which were been built up over the last year or so. With the first two holdings, he eliminated the positions from the portfolio, with CVS up 25% in the year leading up to the start of the third quarter, and Dollar General up more than 60%. Combs also took advantage of the 45% runup in Visa's stock price to eliminate about one quarter of his stake in the firm. As for the other sales in the portfolio, Berkshire reduced its stake in
 Verisk Analytics (VRSK), and finally eliminated its position of  Ingersoll-Rand (IR).

Looking more closely at the purchases, Buffett was likely behind the additional purchases of shares of Wells Fargo and  International Business Machines (IBM). Buffett has thrown money at Wells Fargo in eight of the last nine calendar quarters, with Berkshire now holding a $14.5 billion stake in the bank. As for IBM, the purchase was much smaller, with Berkshire adding another 870,000 shares during the third quarter, leaving the insurer with just over $14 billion invested in the technology giant at the end of the third quarter. The rest of the purchases during the period were initiated, in our view, by Weschler and Combs, with the former likely behind the purchases of shares of  DIRECTV Group ,  DaVita HealthCare Partners (DVA),  Viacom , and  Media General , given his penchant for media stocks, while the latter was likely behind increased stakes in  Bank of New York Mellon (BK),  National Oilwell Varco (NOV), and  General Motors (GM), as well as new money purchases of  Deere (DE),  Precision Castparts , and  Wabco Holdings . That said, this is pure speculation on our part. Unless we are told directly the purchases and sales made by respective managers at Berkshire, we can only guess which transaction belongs to Buffett, Weschler, and Combs based on their past trading activity.

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Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.