Warren Buffett's Berkshire Hathaway's (NYSE:BRK.A) book value dropped by 9.6% in 2008, only the second negative result in its 44-year history. Despite this unfortunate statistic, Berkshire Hathaway's equity investments hold some interesting potential.
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Quite a Large Basket
With an exception or two, Berkshire Hathaway could probably spin-off its equity investments into its own ETF. Its current portfolio holds 41 stocks, 28 of which are valued at less than $500 million. Its smallest holding is a 38% interest in Comdisco Holdings (OTCBB:CDCO), which was obtained as a debtholder when the former leasing company emerged from bankruptcy in 2002. When the figure was $11.5 million at the bottom of the CNBC Berkshire Hathaway portfolio tracker, it seemed impossible. It looked like he must have won the shares in a high-stakes bridge game, but it turns out they're for real. Buffett's largest holding by dollar value is Coca Cola (NYSE:KO) at $8.64 billion. By percentage ownership, it's Wesco Financial (NYSE_AMEX:WSC); Berkshire has an 80.1% stake overseen by Charlie Munger, Buffett's right-hand man. The total portfolio value is currently around $49 billion with the top five holdings accounting for roughly 61% of it. That leaves approximately $19 billion for 36 holdings or an average of $528 million each, with many worthy candidates to choose from. (Read more on Warren Buffet in our related articles, Think Like Warren Buffet and Warren Buffet's Best Buys.)
The One Stock You Should Buy
Looking through the list of 36, there are many intriguing possibilities including Nike (NYSE:NKE), Costco (Nasdaq:COST) and UnitedHealth Group (NYSE:UNH). They're all good companies and would fit nicely in most portfolios. However, the unusual name that stands out is Torchmark Corp. (NYSE:TMK), a Texas insurance holding company. Berkshire Hathaway owns 2.8 million shares, or approximately 3.32%, of its stock. Looking at its 2008 10-K, I can see why. Over the last 10 years, Torchmark has grown underwriting income 8.7% annually and excess investment income 10.3% annually. Not too shabby. Most important, book value per share grew to $39.17 in 2008, an increase of 8%. That is, on a relative basis, it was 17.6% better than Berkshire Hathaway, and that's an accomplishment to be proud of. (For more, see What Is Warren Buffet's Investing Style? and Warren Buffet: How He Does It.)
Conservative to the Core
Torchmark appears to be an incredibly conservative insurance company. Always striving to keep its credit rating strong, the company keeps its risk-based capital ratio above 300%, ensuring it has sufficient capital to keep the business operating. Torchmark ended 2008 with a ratio of 329%, meaning it had $110 million in excess capital to operate its businesses. Furthermore, the parent company achieved a debt-to-capital ratio of 23.6% at year-end, the ninth time in a row it's been below 30%. This is a company that knows how to run its business. For instance, it's been using its free cash flow of the past 11 years to repurchase $2.7 billion in stock. While fundamentally conservative, Torchmark's management isn't afraid to be aggressive when the situation warrants it. This year is one of those times.
Torchmark's first quarter wasn't the best, but it wasn't the worst either. While its 49 cent per share impairment charge on invested assets produced a drop in earnings per share from $1.29 to 91 cents year-over-year, it still managed to produce a 4% increase in its net operating income to $1.49 from $1.43. If you look at Torchmark's current stock price in terms of valuation, you'll want to learn more about this smallish stock. (For more, see Impairment Charges: The Good, The Bad and The Ugly.)