What Else Is Buffett Buying?

Buffett is back, unsurprisingly, and his followers are profiting nicely.

Earlier this year, renowned value investor Warren Buffett was subject to a rare barrage of criticism from financial pundits. One short-selling CNBC regular asked in an essay , "Is This the End of Warren Buffett?" A Toronto columnist wrote that the "tarnished" Oracle of Omaha is not to be taken very seriously. One newsletter writer was reported by The Oregonian to have called Buffett "an idiot," but denied the comment on television, saying Buffett was merely guilty of "poor trading."

Why the badgering? Following Buffett's Oct. 16 essay published in The New York Times, in which he said he had been buying American stocks, the S&P 500 index fell an additional 29%. The piece is perhaps remembered more for its headline, "Buy American, I Am," than for its content, which included the caveat, "I haven't the faintest idea as to whether stocks will be higher or lower a month -- or a year -- from now." Today, the S&P 500 is up about 10% from when Buffett wrote his essay.

Another point of contention: Bets that Buffett's investment vehicle, Berkshire Hathaway (BRK.A), sold to others on a long-term decline in the U.S. stock market initially moved against the company. But by the second quarter, with the stock market rising, those same bets contributed the bulk of Berkshire's profit.

If Buffett's detractors make a valid point, it is that Berkshire Hathaway doesn't quite seem like a bargain. The firm’s yearly increase in book value has more than doubled the S&P 500's return since 1965, but as Buffett's fame has grown, so has the share price premium that investors pay above Berkshire's book value. In May, I wrote that Buffett fans can score good deals by cherry-picking from recent Berkshire purchases that had declined in value. The five stocks I listed have since climbed 32%, versus an 19% increase for the S&P 500 index. They include Burlington Northern Santa Fe (BNI), a railroad that Berkshire announced Monday it plans to buy in full for $100 a share.

At first glance, the price for Burlington seems ambitious -- it works out to more than 20 times this year's earnings forecast. However, those earnings are constrained for now by charges related to Burlington's aggressive investments in upgrading its rail technology. Gross cash flow, which ignores such investments, is more than double earnings. Also, the acquisition might have a smidgen of informational value. Asked earlier this year by an interviewer what his favorite economic indicator is, Buffett named rail car loadings.

Incidentally, Burlington Northern isn't the top performer from those May picks. It's edged out by Eaton (ETN), an industrial equipment maker whose shares have climbed 44%, and still yield 3.2%.

So what has Berkshire been buying and selling other than railroads? There are two main ways to tell. The most timely method is to look at insider trading records, or Securities & Exchange Commission Form 4 filings, but those only apply to cases in which Berkshire is a "beneficial owner," with at least a 10% stake in shares. Insider records show the firm has recently sold shares of Moody's (MCO), in which it once held a 20% stake, and whose bond rating business drew criticism over the past year for signing off on mortgage securities that turned toxic. The more comprehensive method to track trades is to compare quarterly holdings statements, or SEC Form 13F filings. Those can be a bit dated, though: The most recent one shows portfolio changes made in the second quarter. Expect a fresh report reflecting third-quarter trades in mid-November.

In the second quarter, Berkshire dumped Constellation Energy (CEG), a utility, and took profits in Eaton. The firm also reduced its position in ConocoPhillips (COP), Home Depot (HD) and United Health Group (UNH). Those sales helped free up cash to pay for earlier, privately-negotiated purchases of preferred shares of companies such as General Electric (GE) and Harley Davidson (HOG). But Berkshire also bought two common stocks in the second quarter that are available to the rest of us.

The first is Becton Dickinson (BDX), a distributor of medical supplies and a new addition to Berkshire's portfolio. It boasts growing profits and an enviable return on equity of over 20%, and its shares seem modestly priced at 14 times earnings. The second is Johnson & Johnson (JNJ), the giant maker of drugs, consumer products and medical devices. Berkshire added 4.4 million shares to its position in the company during the second quarter. Today, the stock sells for just 13 times earnings.

Value investing students should note one commonality between Becton Dickinson and Johnson & Johnson. Both companies have increased their dividends each year for more than three decades.