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5 Stocks Buffett Gives the Green Light in His Annual Letter

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For the Berkshire Hathaway (NYSE: BRK-B  ) investor, Warren Buffett's annual letter to shareholders is required reading. Of course, considering the lucidity with which Buffett writes about investing, the letter should really be required reading for any serious investor.

Over the weekend, Buffett released the latest edition (opens a PDF file) of the much-anticipated letter and it didn't disappoint. There's plenty to take away from the letter -- including a healthy dose of Buffett's ever-quotable wisdom -- but for investors on the prowl for new investment ideas, Buffett's letter provided a number of possibilities.

Those who follow Buffett and Berkshire no doubt already know that this past year Buffett's company took a hefty stake in IBM. While many of the new stock buys showing up on Berkshire's ledger are coming from Buffett's new hires -- Todd Combs and Ted Weschler -- IBM was all Buffett.

In the annual letter, Buffett gave some more insight into why he likes IBM so much by highlighting the brilliance that management has shown in financial management:

But their financial management was equally brilliant, particularly in recent years as the company's financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Wells Fargo
Buffett is a huge fan of this bank, so much so that at one point he said he'd be willing to put his entire net worth into just that stock. In the letter, Buffett included Wells Fargo when he said that Berkshire has "large ownership interests in four exceptional companies" (IBM was also on that list). He added that he views "these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects."

Regarding Wells Fargo, he didn't need much room to expound on his adoration: "The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels."

Bank of America (NYSE: BAC  )
Speaking of banks, I'll admit that I was surprised that Buffett had such glowing things to say about this battered bank and its CEO, Brian Moynihan. Investors may recall that one of Berkshire's major investments in 2011 was a $5 billion preferred-share investment in B of A. The deal was a sweetheart one for Berkshire, giving it a 6% yield and 10-year warrants to buy 700 million shares of B of A at $7.14. But Buffett backed up the investment further in his annual letter, noting the progress that B of A is making:

At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.

Buffett's comments on railroads logically focused on BNSF Railway since Berkshire owns that rail giant outright since acquiring it in 2009. However, much of his optimism on the business of owning rail lines could be applied to the other major U.S. freight railroads, including CSX. Here's what Buffett had to say:

Measured by ton-miles, rail moves 42% of America's inter-city freight, and BNSF moves more than any other railroad -- about 37% of the industry total. A little math will tell you that about 15% of all inter-city ton-miles of freight in the U.S. is transported by BNSF. It is no exaggeration to characterize railroads as the circulatory system of our economy.

I couldn't find a comparable statistic for CSX's market share, but with more than 21,000 route-miles (BNSF has 23,000) and a fleet of more than 80,000 freight cars (BNSF has 78,600), rest assured that CSX is no slouch.

Buffett continued:

BNSF regularly invests far more than its depreciation charge, with the excess amounting to $1.8 billion in 2011. The three other major U.S. railroads are making similar outlays. ... Massive investments of the sort that BNSF is making would be foolish if it could not earn appropriate returns on the incremental sums it commits. But I am confident it will do so because of the value it delivers.

Procter & Gamble (NYSE: PG  )
Buffett notes that the simple approach of "buy commodities, sell brands" has "long been a formula for business success." He specifically called out Coca-Cola and Wrigley -- which Berkshire has an interest in through debt and preferred-equity investments -- but P&G could also easily fit here.

Many moons ago, Buffett acquired a $464 million stake in Gillette, and that has ballooned into a $4.8 billion chunk of P&G ever since P&G took over the razor maker. Rising commodity prices have been tough on consumer-goods companies lately, but over the long term, it'd be hard to bet against companies like Coke, Wrigley, and P&G that can turn simple commodities into branded must-haves.

Bonus buy: More Buffett banking love
As is obvious from the list above, Buffett is confident in the banking sector. He's been buying up banking stocks, and he's been joined by some other very sharp investors. Wells Fargo and B of A were both highlighted above as Buffett picks, but where else should investors be looking? My fellow Fools have put together a special report examining exactly that question. Click here to get a free copy of that report.

The Motley Fool owns shares of Bank of America, Berkshire Hathaway, Coca-Cola, Wells Fargo, and International Business Machines. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Berkshire Hathaway, and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Bank of America and Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (10) | Recommend This Article (72)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2012, at 5:22 PM, Sotograndeman wrote:

    And in his CNBC interview he uncharacteristically mentioned that he owns some JP Morgan Chase in his personal portfolio. JPM has moved up alot recently and may no longer be a buy.

  • Report this Comment On February 28, 2012, at 5:26 PM, xetn wrote:

    So Buffett loaded up on these shares and we are now (the retail crowd) supposed to jump on board so we can increase his share values?

    I am of the firm belief that to make real returns on stocks or any other investment, you need to be a contrarian. That means finding shares that are mostly off the radar. I must be *Foolish.

  • Report this Comment On February 28, 2012, at 6:53 PM, BuyloPESellHiPE wrote:

    The 5 stocks are wonderful in their own right except for BAC. I dont know what Mr. Buffett was thinking when he bought BAC. Even if the stock came back, it would be a speculative pick and not "Risk Averse" as he always preaches. As wonderful as the rest of the companies listed in this article are, you would have to get them at wonderful prices; and they were about a year ago.

  • Report this Comment On February 28, 2012, at 7:13 PM, lau56806 wrote:

    Mr. Buffett has special treatment on his BAC preferred stock which we do not have the luxury. He has special higher dividends and guarantee repayment by Bank of America.

  • Report this Comment On February 28, 2012, at 7:41 PM, karlm1 wrote:

    Buffet didn't buy BAC common. He got the warrants for basically zero dollars and zero risk. This was a heads I win and tails you lose trade.

  • Report this Comment On February 28, 2012, at 11:05 PM, TheDumbMoney wrote:

    Couldna said it better about Moynihan myself!

  • Report this Comment On February 29, 2012, at 1:06 PM, bretco wrote:

    Buffett: Please buy my recomendations so I can remain the Sage of Omaha.

    fool: Isn't that promoting self interest ?

    Buffett: Just look at how Fool promotes me,

    I must be right-on or Fool wouldn"t

    promote me as they do !

    fool: Oh Mr. Wizard of Omaha, you must be right

    otherwise Fool wouldn't promote you as

    they do. May I please load up on some

    of the same BOA stock and warrants as

    you purchased ?

    Buffett: Why do you think they call me the

    "Sage" ?

  • Report this Comment On February 29, 2012, at 3:55 PM, mikecart1 wrote:


    "This was a heads I win and tails you lose trade."

    This was really a heads I win, tails I win, Buffet I win trade hehe.

  • Report this Comment On March 02, 2012, at 5:10 PM, Usishkin wrote:

    As coal is being replaced by Gas for power stations, gas pipes will replace trains. Trains rely too heavily on coal, in the US and oversees.

    I bought MLPL soon after it became available... check it out.

    and... I sold my CSX, and soon my will sell UNP

  • Report this Comment On March 03, 2012, at 1:59 AM, Libertarian71 wrote:

    So Warren Buffett is "talking his book" in his annual apostolic letter. Why is this news?

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