By Robert R. Johnson, Ph.D., CFA, CAIA. Robert is a Professor Finance in the Heider College of Business at Creighton University and is also the author of several books including Strategic Value Investing: Practical Techniques of Leading Value Investors.
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s 13F filing yesterday garnered a great deal of attention from the media. Four things stood out – 1) the new stake in Verizon Communications Inc. (NYSE:VZ); 2) the increased stake in Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB); 3) the increased position in Wal-Mart Stores, Inc. (NYSE:WMT); and 4) the reduced stake in Phillips 66 (NYSE:PSX). There is a common theme throughout these four moves.
Warren Buffett likes stocks with large economic moats
Warren Buffett likes stocks with large economic moats – competitive advantages that are difficult to breach. Verizon Communications Inc. (NYSE:VZ) and Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) are classic Buffett stocks. They sell products with high switching costs – one-time costs or expenses that consumers incur to change from one product provider to another. These costs lead consumers to stay with the same provider, producing a long-term revenue stream to the company. Cell phone and cable television companies have business models with high switching costs. DIRECTV (NASDAQ:DTV), Verizon and Liberty Media all fit this mold. While some may view cable TV as a very mature market – and it is in the US – DirecTV is expanding operations throughout Latin America and Liberty Global is enhancing EU operations.
While it may seem that Wal-Mart Stores, Inc. (NYSE:WMT) is a very different type of firm than Verizon Communications Inc. (NYSE:VZ), Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) or DIRECTV (NASDAQ:DTV), they actually do share a common quality. Wal-Mart has a moat, but a different kind. It is a low-cost producer and its size and buying power make it very difficult to compete with. The behemoth sells virtually everything in nearly every U.S. market and is expanding global operations. Wal-Mart’s strategy and enormous market share has provided it with another economic moat as Forbes recently listed it as having the world’s 18th most valuable brand.
Warren Buffett reduces position in Phillips 66
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) significantly pared its position in Phillips 66 (NYSE:PSX) – a company with, I would argue, no economic moat (or at least a moat that is more easily breached). It appears that the rationale for this move is simply valuation oriented. The stock has had a tremendous run over the past 5 years – advancing from 30 to over 50 while paying a handsome dividend. The current valuation multiples (P/E, price to sales, and price to book) are all higher than the industry average.
It appears that Warren Buffett and his colleagues are firmly ensconced in the Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) castle.