Keeping An Eye On Berkshire's Buys

By Peter Cherewyk | December 14, 2008 AAA


Berkshire Hathaway
(NYSEL:BRK.A, BRK.B) has not been too hot in the last year, but who has? In the last 12 months it's down almost 34%, but the S&P 500 is down 41.5%, so I guess it could be worse.

Legendary investor Warren Buffett is the head of Berkshire. His stock picks have helped build an empire, and there is money to be made by following his lead. In this article we'll look at some of the most recent moves. (To learn more about Buffett, read Warren Buffett: The Road To Riches.)

Burlington Northern Santa Fe Corporation
Put options written by Berkshire Hathaway on 2.22 million shares of Burlington Northern Santa Fe (NYSE:BNI) were exercised on December 11, according to a form 4 filed December 12. Burlington Northern is a railroad company that deals primarily in the transportation of commodities and goods; 1.22 million shares were purchased at a $75 strike price and 1 million shares at $76. Buffett paid more than the market price, but once you take into account the put contract prices, he actually bought the stock for less than what it was trading for on the day the options expired.

Excercise Of Put Options By Berkshire Hathaway
December 11, 2008
Excercise Closing Price Option Premium Adjusted Cost Per Share Shares Gain
$74.77 $6.201 $69.80 1,000,000 7.12%
$74.77 $7.094 $67.91 1,217,500 10.10%
Unexcercised $6.3538 $68.65 2,325,000 Pending

After this purchase Berkshire Hathaway held a total of just over 70 million shares in Burlington Northern. In the month of December, Buffett has increased his holdings by 6.3%. Also there is still a put option for more than 2.3 million more shares with an exercise price of $75 that expires at the end of January 2009. With the price of the derivative set at $6.3538 per share, the stock would need to sell for $68.65 to break even. This is just above the 52-week low of $68.31 set on November 21 and BNI has not closed below $70 since 2006. In late 2007, Berkshire was expected to pick up 25% of all shares in the rail company. At that time it was trading around $80, now it's trading at just over $70 and Buffett's holding company owns 20.47% of the shares.

Other Berkshire Moves

Berkshire Hathaway kept most of its holdings constant from June 2008 to September 2008 demonstrating Buffett's long term approach to investing. Two major moves that caught my eye include the sale of Bank of America (NYSE:BAC) shares and the purchase of NRG Energy (NYSE:NRG) stock.

Bank of America went from a 9.1 million share position to 5 million shares, or a 45% decrease. NRG Energy, an owner of power generating facilities mostly in the U.S., saw an increase from 3.24 million shares to 5 million held. NGR was initiated as a position in August of 2008, since that time the stock price has fallen about 35%. Berkshire increased its stake by 54% which shows faith in the company's ability to turn things around in the coming years.

Bottom Line
Warren Buffett has stated that he buys "on the assumption that they could close the market the next day and not reopen it for five years". Positions now could see short term dips, in fact, they should be expected. Investors like Buffett try to look through the short term volatility for longer term gains.

Read more in The Greatest Investors: Warren Buffett and Why Warren Buffett Envies You.

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