Warren Buffett's Top 5 Buys In 2011

Includes: BRK.A, IBM, KO, MDLZ, PG, USB, WFC
by: Tim McAleenan Jr.

From June 1st through September 30th, 2011, Warren Buffett invested $24 billion worth of Berkshire Hathaway's (BRK.A) cash hoard, making it his quickest outlay of cash in such a short time frame since 1996. At the 2011 annual shareholder meeting, Buffett mentioned that he felt as if he had "a loaded elephant gun" and was ready to make large purchases. He did not disappoint in this regard, and I compiled a subjective list of what I consider to be Buffett's five biggest moves this year.

5. The Purchase of Wesco Financial. Going into 2011, Wesco Financial was already 80.9% owned by Berkshire Hathaway. This Berkshire subsidiary was run by Berkshire Vice Chairman, Charlie Munger, and consisted of largely five parts. It ran a reinsurance business out of Omaha, a Kansas surety company that sold insurance to Midwestern banks, a furniture business in Virginia, and a steel warehouse in Chicago.

The fifth part of the company consisted of the highly concentrated investment portfolio run by Charlie Munger. The bulk of Wescos portfolio holdings (over 80%) included companies already in Berkshire's portfolio, namely: Procter & Gamble (PG), Coca-Cola (KO), Wells Fargo (WFC), Kraft (KFT), and United States Bancorp (USB). So naturally, these shares folded nicely into Berkshire's already substantial investment portfolio.

On a sad side note, the purchase of Wesco represented an end to a great tradition among the Buffett and Munger faithful-many investors. Many disliked the impersonal touch of attending the Berkshire Annual Shareholder Meeting with 30,000 others. So they would flock to California every May/June for the Wesco Meeting with Shareholders, to talk to Charlie Munger with the personal touch that the Berkshire faithful wished they could find Buffett. Since Wesco no longer exists as a publicly traded company, this last Annual Shareholder Meeting with Munger was the last one ever.

4. The purchase of Lubrizol. Buffett paid $9 billion for the highly profitable chemical giant to add yet another layer of diversification to Berkshire's operations. The analysts expect that for the coming calendar year Lubrizol will be able to send $350-$400 million worth of profits to Omaha for Old Man River himself to reinvest into new opportunities.

Unfortunately, this purchase was largely overshadowed by the scandal with Berkshire employee David Sokol engaging in sketchy behavior that had the appearance of impropriety. Sokol bought shares of Lubrizol for his personal account before Buffett bought the company outright, and this action certainly seemed to cross some ethical barriers. But five years from now, no one is going to remember Sokol's resignation from Berkshire, and the hundreds of millions of dollars in Lubrizol profits will be making their way to Berkshire's headquarters to be deployed for new investments.

3. More, more, more Wells Fargo stock. Buffett first began making large purchases of Wells Fargo in the early 1990s (1991-1993 mostly) when the savings and loan crisis led to many predicting the demise of Wells Fargo, with the company reaching a low of 3x earnings in its valuation. Back then, Buffett invested billions of Berkshire's dollars into the California lending giant, and this time around seems no different.

Buffett added billions of dollars to his Wells Fargo purchase in the first half of 2011, making it the company's second largest holding in the investment portfolio right behind Coca-Cola. For the first six months of 2011, Buffett paid an average of $28 per share for Wells Fargo stock, and the price fell below that in the second half of the year. Although we won't know what Buffett's been up to over the past couple of months until early 2012, it seems conceivable to think that he added more to Berkshire's Wells Fargo stake, since the shares of the company fell below the $28 per share purchase price from earlier in the year.

2. The Sweetheart Deal with Bank of America. Most likely, Buffett's move into Bank of America will make shareholders quite a lot of money when it's all said and done. The basics of the deal are as follows-- Bank of America created a special type of preferred stock by issuing Berkshire Hathaway 50,000 shares of the preferred classification, valued at $100,000 per share, for a total of $5 billion. This preferred stock will pay Berkshire 6% annually in perpetuity. Should Bank of America want to end the arrangement, it will have to pay Berkshire a 5% premium of $250 million. Should Bank of America ever go bankrupt, the shares of the preferred stock would stand in line ahead of the common shareholders to redeem the liquidated assets.

This is the sweet part of the deal. Buffett gets warrants to buy up to 700,000,000 shares of BAC for the price of $7.14 per share. That's especially sweet considering that Buffett gets up to ten years to decide on whether or not he wants to exercise the warrants and buy the shares.

1. The Monster IBM Investment. When Buffett interviewed on CNBC to discuss the IBM investment, he mentioned his fondness for the company's "Five Year Plan" which outlined the path to doubling earnings over that time frame. Buffett mentioned that he was impressed by the company's ability to reach its previous five year objective. Because the current plan for doubling earnings (outlined by management) seemed likely, Buffett spent most of the year purchasing $10.7 billion worth of the stock. Furthermore, Buffett went on to describe IBM's moat thusly:

"And if you think about it, I don't want to push the analogy too far because it could be pushed too far. But, you know, we work with a given auditor, we work with a given law firm. This doesn't mean that we're happy every minute of every day about everything they do but it is a big deal for a big company to change auditors, change law firms. The IT departments, I-you know, we've got dozens and dozens of IT departments at Berkshire…And that doesn't-that doesn't mean things won't change but it does mean that there's a lot of continuity to it. And then I think as you go around the world, IBM, in the most recent quarter, reported double-digit gains in 40 countries. Now, I would imagine if you're in some country around the world and you're developing your IT Department, you're probably going to feel more comfortable with IBM than many companies."

A lot of people never thought they'd see the day when Warren Buffett initiated a position in a technology company. However, it's important to keep in mind why Buffett said he traditionally avoided the sector. He often stressed his inability to project any tech company's competitive position ten to fifteen years into the future. With IBM, Buffett feels comfortable enough predicting the company's future earnings to give Big Blue a top three slot in the Berkshire investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.