Warren Buffett is America's most celebrated investor, so it is always a newsworthy event when he takes a new stake in a company. Savvy investors who monitor Berkshire Hathaway's Form 4 insider trading filings discovered that Berkshire had acquired over 10% of Burlington Northern Santa Fe (BNI) on April 6th. BNI is now one of the largest holdings in Buffett's portfolio.
But while the Form 4 filing was the first glimpse afforded to the outside world about Buffett's new stake in BNI, it doesn't tell the whole story.
A month later, on May 15th, Berkshire Hathaway filed its quarterly 13F filing with the SEC. This revealed that in addition to their large stake in BNI, they had also acquired positions in railroad companies Norfolk Southern (NYSE:NSC) and Union Pacific Corp (NYSE:UNP). The combined railroads holdings now constitute their 5th largest investment.
The sheer size of the aggregate railroad investment - on par with Berkshire Hathaway stalwarts American Express (NYSE:AXP), Coca-Cola (NYSE:KO), Procter and Gamble (NYSE:PG), and Wells Fargo (NYSE:WF) - indicates that they are quite confident in their analysis. As his partner Charles Munger has previously said, "... it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times."
What is also interesting is that Buffett didn't make a bet on a single railroad company, but on three. So it may not be that he saw value in BNI per se, but in the railroad industry as a whole. Railroads have always had near-monopoly status where they have operated because of the sheer amount of infrastructure required, and trade (and goods shipped) has increased due to NAFTA, but these and other traditional characteristics should have already been priced into the stock.
So where could the value that Buffett so clearly sees be coming from? Two things spring immediately to mind:
1. The coverage maps of the three railroads are somewhat complimentary - BNI and UNP operating in different portions of the west, NSC operating in the east. A merger could create efficiencies that increase the value of the combined companies that do not currently exist.
2. With the passing of "Peak Oil" and higher gas prices, railroads will increase in value as they are the most efficient method to move cargo across the country.
Regardless of what Buffett sees in the railroads, this is the most significant "loading up" we've seen from them in quite some time. It's been years, almost decades, since they made their initial stakes in American Express, Coca-Cola, Gillette (since bought by PG), and Wells Fargo, and you may have missed that boat. However, right now it seems that railroads are his next great investment and those who knew about that initial Form 4 filing have entered on the ground floor with him.
Disclosure: author has no position in stocks mentioned