Warren Buffett Makes 2 Major Stock Buys

In the fourth quarter, Warren Buffett made two major investments -- totaling $1.5 billion -- in stocks of companies that are household names.

Patrick Morris
Patrick Morris
Feb 21, 2015 at 10:20AM
Investment Planning

The latest stock holdings from Warren Buffett and Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) are in for the fourth quarter, and there were two giant moves that should grab the attention of investors everywhere.

The new position?
Companies are required to file a 13F filing with the SEC, which reveals what stocks they held at the end of the quarter. This week, Berkshire had to file two: one for the fourth quarter, as well as an amended version of its third-quarter report.

Curiously, in the third quarter it was widely reported (here at The Motley Fool and elsewhere) that Berkshire sold its entire stake in in Deere & Company (NYSE:DE), parent company of John Deere.

But in an interesting twist, it turns out the amended third-quarter filing reveals that the stake was there all along, and in the third and fourth quarters Buffett and company weren't selling it, but instead buying it. At the end of the third quarter, Berkshire held nearly $600 million of the company's stock, and it more than doubled its stake in the fourth quarter, bringing its total position to more than $1.5 billion.

This serves a valuable lesson to investors. As previously noted, 13F filings may or may not present the entire picture of what a company owns, as a result of the various nuances and eccentricities that accompany SEC filings. So it's always best to make your own investment decisions based on the investment prospects of the companies themselves, not just what others may -- or in this instance, may not -- be doing.

But having said that, it's important to see that Deere presents a number of reasons Buffett -- and either Todd Combs or Ted Weschler, who also manage a sizable portion of the Berkshire portfolio (nearly $9 billion each, according to The Wall Street Journal) -- would want to buy it.

First, it operates in a stable agricultural business that isn't going anywhere, anytime soon. Next, as fellow Fool Lee Samaha suggests in his article outlining three reasons the stock could rise, since crop prices will probably be falling in the U.S., demand for Deere's machinery will grow.

Throw in the fact that it trades at an incredibly reasonable trailing-12-month P/E ratio of 10.7 and offers a 2.7% dividend yield -- two things Buffett also loves -- and it makes much more sense that Deere is on pace to become a staple position in the Berkshire Hathaway stock portfolio.

Buying more and more
In addition to purchasing more Deere & Company, Buffett has once again added to his stake in IBM (NYSE:IBM), buying an additional 6.5 million shares (roughly 10% more) at a cost of a little over $1 billion.

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As I discussed last quarter, from the market's perspective, the performance of IBM has been abysmal since Buffett first bought into the technology giant in 2011.

But that's true only when you gauge it only based on the performance of its stock, not the actual performance of its earnings attributable to Berkshire. And a little back-of-the-envelope math reveals that -- based on Buffett's continued commitment to buy IBM stock, while the company itself has been repurchasing its own shares -- his ownership of the company has grown substantially through the years:

As a result, even though IBM's earnings from continuing operations fell by 7% in 2014 relative to 2013, the income attributable to Berkshire rose by nearly 20% thanks to the fact IBM reduced its shares outstanding by 6%, and Berkshire boosted its own stake by 13%.

In other words, even if it looks like IBM isn't performing well, according to Berkshire's bottom line, it's doing just fine.

This, too, reminds us of the reality that Buffett always considers his stock positions in companies not as numbers that move up and down on a screen, but instead tangible interests in operating businesses. So while the performance of IBM as a stock has left something to be desired, since Berkshire's stake in IBM has been rising more quickly than its earnings have been falling, Buffett probably couldn't be more pleased with the outcome.

The Foolish bottom line
Should we blindly follow Buffett and go out to buy stakes in IBM and John Deere based on the latest moves of Berkshire Hathaway? Of course not.

But in each case, we can learn a valuable lesson on how we should view investments and also get two more stocks to put on our radars.