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.
IBM (NYSE: IBM )
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.
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.
CSX (NYSE: CSX )
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.
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.