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Grading Warren Buffett’s Portfolio (BRK-A)


Last week, Warren Buffett’s Berkshire Hathaway (BRK-A) agreed to pay $26 billion for the remaining shares of Burlington Northern (BNI) it didn’t already own. This is in addition to Buffett’s other railroad stock Union Pacific (UNP). This is a massive investment on Berkshire’s part.  So why the big bet on railroads? Buffett joked that his father didn’t buy him a train set as a kid.

As usual, Buffett thinks he has spotted a good company going for a good price—and, as usual, he’s probably right. That’s why it’s always a good idea to keep an eye on where Buffett is investing. He rarely lets a good deal pass.

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However, my team and I looked at BNI, and we’re not nearly as optimistic as Buffett. Earnings for the railroad are shaping up to be down this year, and there probably won’t be much growth next year. For now, I have Burlington Northern rated as a Hold on my. In fact, I’m pretty leery of many transportation stocks as a sector.

Now Buffett is the classic value investor, while I’m focused on growth. The New York Times even contrasted us when it wrote, “Mr. Buffett, of course, is a longtime value investor; Mr. Navellier is an icon among growth stock investors.”

But that’s not the reason why we disagree so much on these stocks. Buffett’s holding period is, essentially, forever, while I prefer to hold stocks for a few months or even a few weeks. The market changes quickly, and it’s important to stay on top of events. My team and I run countless tests examining the fundamental strength of every major stock on Wall Street. Only the top of the top are rewarded with Buy ratings. We test each stock across a range of 11 variables, and we use different time periods as well. Our models are always kept up-to-date so we can spot the latest breakout stock.

With that in mind, I wanted to take a look at some of Berkshire’s largest public holdings to see how well they rate in Portfolio Grader, my proprietary stock rating system.

Buffett’s Financial Stocks Are Still in Trouble

Buffett is a big fan of banks and financial services firms. Currently, Berkshire Hathaway owns large stakes in American Express (AXP), Wells Fargo (WFC), US Bancorp (USB) and Wesco Financial (WSC).

I’ve been cautious on the financial sector.  I think too many shaky firms have been rallying on manufactured (or heavily-aided) earnings. Of Buffett’s list, I currently rate both Wells Fargo and American Express as Holds. Wells Fargo is a well-run outfit, but even if all goes well, the bank will most likely see its earnings fall next year. And I’m still disappointed that Amex bombed with its Q2 earnings report over the summer. They didn’t even make half of what analysts were expecting.

The rest of Berkshire’s financial stocks are even shakier. I rate both US Bancorp (USB) and Wesco Financial as Sells. USB has, impressively, not posted a quarterly loss during the credit crisis, but the bank’s earnings have plunged dramatically. I think it could be another three years before profits get back on track. Therefore USB is a Sell. Wesco is an unusual company. It’s an insurance business that’s also involved in furniture rental and steel service. Similar to other Berkshire holdings, like the Washington Post (WPO), WSC has a high share price, currently over $330. My concern is that at that price, the stock is going for 33 times earnings, which is simply too rich for me. Wesco is a Sell.

One more financial services firm Berkshire owns is Moody’s (MCO). This was a top performer for Buffett until the credit market collapsed.  Now the ratings agencies are public enemy #1. The firms have been rightly criticized for having an all-too-cozy relationship with the firms they were supposed to be judging fairly. The political backlash is going to be strong here. Moody’s is a Sell.

Stocks Like Best Buy and CarMax Will Show the Consumer Is Coming Back to Life

So while I’m not with Warren on the financials, we do agree on the power of owning consumer oriented stocks. This week, one of Buffett’s top retail stocks, Wal-Mart (WMT) reported earnings. The company announced decent earnings, but results from stores open at least a year fell. I think Wal-Mart will do well this holiday season, but I don’t think it will be enough to budge earnings and, therefore, move the stock dramatically. That why this holiday season, I urge investors to instead focus on niche retailers like Best Buy’s (BBY) and CarMax (KMX).

I also recommend selling Procter & Gamble (PG) and Kraft Foods (KFT). Kraft is in the middle of a hostile takeover attempt for Cadbury (CBY). They started by playing nice and offering a huge premium. Cadbury’s board, however, shot down the offer. Now Kraft is playing hardball, and they’re going to try to buy all the shares they can. It’s a bold move, but I don’t think it will help Kraft in the short term. Cadbury is a Buy, as it is the winner in this battle. Kraft is a Sell.

Coca-Cola and Nike Are Buys

Two of Buffet’s stocks that I like right now are Coca-Cola (KO) and Nike (NKE). Both are excellent recession-resistant companies. Folks don’t usually cut back on shoes or soda just because the economy has hit a rough patch. Coke’s earnings will be down for this year, but I expect to see a rebound for 2010. Coke will also benefit from a weaker U.S. dollar. Nike had a very good earnings report in late-September. The shares aren’t far from a new all-time high. I think this stock could be a breakout winner next year.
Rounding out Buffett’s top stocks, I rate the Washington Post, ConocoPhillips (COP) and Johnson & Johnson (JNJ) as Sells. Big Media, Big Oil and Big Health Care are all going to have challenging environments going forward, and while there will be some winners in these areas, I don’t think WPO, COP or JNJ are the stocks to bet on. The better investments will be found in smaller areas and in emerging sectors.

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