We all have a fantasy we'd like to see come true.
For some, it's being in your favorite football team's locker room during the coach's inspiring halftime speech. For others, it might be a backstage pass to a legendary musician's concert.
Nothing so pedestrian for us. Instead, we ask: What if you could be inside Berkshire's boardroom and see how its directors vet potential companies for investment?
Luckily, that's not just a pipe dream -- there's a way we can find out.
Warren Buffett's Berkshire Hathaway (BRK-A) recently disclosed its holdings through a 13F filing with the Security and Exchange Commission (SEC). Overall, Berkshire's equity positions increased roughly 4.7% from the previous quarter, to $89 billion, which tells us Buffett is a buyer in a market that others have been disparaging.
However, Berkshire's success speaks for itself. Shares are up 73% since 2009 -- more than 18% year over year. The Oracle of Omaha clearly has a method to his madness.
A glance at the 13F filing reveals far more information than just ticker symbols and number of shares. It tells us what positions are being added and which sector they belong to. A couple of interesting things stand out immediately.
Energy company Suncor (SU) has been added to a portfolio already occupied by ConocoPhillips (COP) and Phillips 66 (PSX), which means Berkshire is heavily invested in the U.S. energy revival. And satellite television provider Dish Network (DISH) is a new holding altogether.
Perhaps the most interesting addition was the nearly 50% increase in shares of Chicago Bridge & Iron (CBI), to $9.55 million. This Netherlands-based industrial engineering and construction company has been touted by another investment guru turned Berkshire director, Meryl Witmer.
Witmer is general partner of Eagle Capital Management and a participant in Barron's annual roundtable who was recently appointed as a Berkshire board director. As a student of value investing, her holdings show a lot of similarities to Buffett's. Once again, Dish Network shows up as a new position, and Coca-Cola (KO) can be found in both portfolios.
In February, Witmer spoke at the annual Barron's Roundtable and named Chicago Bridge & Iron as one of her top three picks for 2013. Since then, the stock has risen nearly 20%. This is the same company we see on Buffett's 13F being bought hand over fist.
The value investing principles used by Buffett and Witmer are surprisingly simple. Every company they invest in shares three similarities:
Strong Customer Base
Companies on Berkshire's radar have a growing customer base. In the case of Chicago Bridge & Iron, they're positioned to take advantage of the growth in natural gas and shale oil. Customers who are expanding their operations will be even more reliant on Chicago Bridge's proprietary technologies. In the case of Dish Network, Buffett exited his position in newspaper publisher Gannett (GCI) in favor of an Internet and TV medium.
Enduring Business Model
It may seem obvious, but it's important to invest in a company that has long-term staying power, and not positioned for just a short-term trade. Again, we can learn from Chicago Bridge & Iron. As America gears up for higher oil production and natural gas usage, Chicago Bridge's business of building industrial infrastructure is going to be needed for the next decade at a minimum. A high-cost barrier of entry to the industry makes for a solid company with little competition. Knowing where a company derives its profit from is essential and one of Buffett's investment rules: "Know what you own."
Value investing is all about finding undervalued companies. The oversight in valuation may stem from low earnings, heavy debt, a low credit rating, or anything else investors may be wary of. Berkshire excels at looking beyond current numbers and estimating future growth. Witmer based her calculations for Chicago Bridge on the possibility of an acquisition that would improve margins and expected future growth related to its expanding product lines. With Suncor, disappointing earnings have brought the stock down to a level that makes it attractive due to a number of positive catalysts, such as its dividend payout and improving margins.
Risks to Consider: Value stocks can stay below fair market prices for extended periods of time. Adverse economic conditions may also keep discounted stocks artificially low as investors flee to safer havens.
Actions to Take --> Witmer has placed a target of $100 a share for the fair value of Chicago Bridge & Iron, giving it room for a 64% gain by the end of the year. Suncor is undervalued at $34 and should benefit from doubled expected earnings in 2014.
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