Seeking Alpha
Investment advisor, portfolio strategy, macro, long/short equity
Profile| Send Message| ()  

Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) portfolio of publicly traded stocks (as of June 30, 2013 SEC form 13-C) is currently up about 2.52% (3.09% inclusive of dividends) from June 30, 2013 to October 17, 2013, according to SER's ranking of his holdings. Meanwhile, Berkshire Hathaway stock is up 4.47% from $111.92 to $116.92. For the same period, the S&P500 index is up 7.9% from 1,606.28 to 1,733.15. Currently, Buffett's top 5 holdings are Wells Fargo & Company (WFC) at 21.66%, the Coca-Cola Company (KO) at 16.89%, American Express Company (AXP) at 13.33%, International Business Machines (IBM) at 13.05% and Proctor & Gamble Company (PG) at 4.59%. The combined value for these holdings stands at $63.45 billion, comprising 69.52% of Buffett's $91.27 billion portfolio.

Berkshire Hathaway Inc. June 30, 2013 to October 17, 2013


(Click to enlarge)

Source: Yahoo Finance

According to SER's ranking of the performance of Buffett's stocks, IBM is currently ranked 42 out of 42, with the worst performance at -8.52% since June 30, Coca-Cola is ranked 40 out of 42 at -3.89%, Proctor & Gamble is ranked 32 at +3.16%, Wells Fargo is ranked 31 at +3.42% and American Express is ranked 22 at +7.32%. Given such data, it is no surprise that Buffett's stocks portfolio is underperforming as it is being dragged down by at least 4 out 5 of its largest holdings.

Although such stocks have been a drag on Buffett's performance since June 30, 2013, it is unlikely that they would continue to underperform the broader market. Naturally, we are assuming that Buffett has not rotated out of these holdings since end of June (yet to be confirmed in the next form-13c filing). In an article we published on October 10, 2013 "Shutdown impact on Buffett top holding IBM", we concluded that Buffett's top five stocks are likely to perform well during the next year for several factors, while historically they had also been relatively unaffected by government shutdowns, and have actually performed well in such environment (although we certainly are not claiming causality).

The largest drag on Buffett's portfolio is IBM. IBM shares dropped by 6.37% on October 17 following the release of its earnings results for the quarter ending in September 2013. IBM beat average analysts' earnings estimates by about 3 cents, with earnings coming in at $3.99, while revenues of $23.7 billion missed analysts' estimates of $24.75 billion.

IBM's revenues were primarily affected by underperformance in the hardware sector, while China business dropped by about 22%. Such factor could prove temporary as China is revamping its economic development plan which is expected to be announced in November of this year. As a result, many businesses could be waiting to see such plan before committing to purchases.

IBM Stock Price from June 30, 2013 to October 17, 2013


(Click to enlarge)

Source: Yahoo Finance

With current average analysts' earnings estimates of $16.88 per share for the year ending December 2013 and $18.09 for the year ending December 2014, IBM is now boasting price/earning ratios of 10.36 and 9.66 respectively. Such earnings estimates have already been revised lower from $16.91 per share for 2013 and $18.38 for 2014. Given IBM's earnings beat, we believe the negative reaction to the revenues miss has been somewhat exaggerated. At the same time, IBM will most likely respond by cutting its costs and headcount, whereby if the slowdown in Asia proves temporary, IBM will benefit from a resurgence of business as well as lower costs.

Conclusion

The performance of Warren Buffett's stock portfolio is currently being dragged down by 4 of its 5 largest holdings, with IBM being the largest culprit. However, as we believe IBM shares currently offer attractive valuations, while we also expect Coca-Cola, Proctor & Gamble, American Express and Wells Fargo to do well during the next 12 months, it is likely that Buffett's portfolio will make up some lost ground during the next 6 months. Meanwhile, given the recent pullback in the price of IBM shares, we would also recommend buying IBM for a long term trade.

Source: Are Warren Buffett's Top Holdings A Drag On His Portfolio?