U.S. Markets closed

Berkshire Hathaway's Smaller Positions, Part 2

- By Rupert Hargreaves

Yesterday, I looked at some of the smaller positions in Warren Buffett ( Trades , Portfolio )'s equity portfolio. Since there are so many small positions that don't get as much attention as the more substantial holdings, I want to look at two more of these often overlooked equity investments.


Yesterday, I profiled Suncor (SU) and StoneCo (STNE), two positions that appeared in Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) equity portfolio in the fourth quarter of 2018. Berkshire has around $550 million invested in these two holdings. It also owns $441 million worth of shares in Restaurant Brands International (QSR).

Buffett and Ackman

Restaurant Brands is an interesting business, not least because it also counts the activist investor Bill Ackman (Trades, Portfolio) as one of its largest investors.

Shares of the company, which owns Burger King, Tim Hortons and Popeyes Lousiana Kitchen, slumped toward the end of last year, but have since recovered all of their lost ground. Year to date, the stock is up nearly 30%.

404432675.png

This business is pretty similar to the others in Berkshire's portfolio. It is high quality and uses relatively little capital as it generates royalty fees from its leading brands. In 2018, Restaurant Brands grew total net units by 5%, with 6% growth at Burger King, 2% at Tim Hortons and 7% at Popeyes.

Ackman believes the stock is substantially undervalued. Here is what he said about the company in his 2018 letter to investors of Pershing Square:


"The company's unique business model allows it to capitalize on its significant long-term unit growth opportunity with minimal capital investment. QSR's strong overall business performance continued during 2018 with 25% EPS growth, which reflects strong business progress and the benefits of the refinancing of the 9% Buffett preferred

.

...

QSR currently trades at 22 times our estimate of this year's free cash flow, which is a discount to lower-growth franchised peers and below our estimate of intrinsic value. We believe that continued improvement at Tim Hortons, and the opportunity for the company to tell its story at its first QSR investor day in May, will highlight the company's significant long-term growth potential and serve as potential catalysts for future share price appreciation."



Property income

Another company that makes up a relatively small portion of Berkshire's equity portfolio is STORE Capital Corp. (STOR).

According to the conglomerate's fourth-quater 13F filing with the Securities and Exchange Commission, Berkshire owned 18.6 million shares of STORE Capital at the end of 2018, which were worth around $527 million, making up just 0.2% of the $185 billion equity portfolio.

STORE is a real estate investment trust. At the end of 2018, the company's real estate portfolio was worth $7.6 billion, representing 2,255 property locations. Around 95% of the portfolio is commercial real estate properties, and the rest is "mortgage loans and direct financing receivables primarily on commercial real estate buildings."

1927370869.png

Is not immediately clear what the investment team at Berkshire likes about this business, though if I were to hazard a guess, I would say the REIT's value creation over the past six years is a strong sign they like what management is doing.

Over the past six years, shareholder equity has grown at a compound annual rate of 37.9%, and book value per share has increased at a rate of 20.2% per annum since 2013. On top of that, investors have been rewarded with a handsome dividend policy.

The payout has increased from $1 per share in 2014 to $1.26 for 2018. At the current price, the stock yields 4.1% and trades at a price to tangible book ratio of 1.9.

Disclosure: The author owns shares of Berkshire Hathaway.

Read more here:

  • A Look at 2 of Berkshire Hathaway's Smaller Investments
  • Learning From Warren Buffett's Mistakes
  • Buffett, Malone, Bezos, Gates: What Links These Managers?


This article first appeared on GuruFocus.