Buffett reloads the elephant gun

The Oracle of Omaha’s trigger finger must be very itchy

Warren Buffett may well be loading Berkshire Hathaway’s (NYSE: BRK-A, BRK-B) ‘elephant gun’.

The company reported recently that it was a net seller of shares during its second quarter, and that its cash hoard had topped US$40 billion.

Buffett has long said he would make sure Berkshire had a ‘Fort Knox’ balance sheet, by keeping a cash buffer of US$20 billion for unexpected insurance claims, but the company has found itself with twice that much cash.

Trimming its holdings

The investment and insurance conglomerate was busy during the quarter, selling its entire holding in Intel and cutting its investment in consumer and medical healthcare company Johnson & Johnson by almost two-thirds.

Berkshire also sold shares of a long-time Buffett favourite, Procter & Gamble (NYSE: PG), lightening this holding by around 20%. Continuing the theme of reducing its consumer-facing portfolio, it disposed of one-quarter of the company’s Kraft (NYSE: KFT) shares — unsurprising, given Buffett’s criticism of recent moves by the food giant’s management.

Giving his managers their head

In a nod to Buffett’s advancing age, the master investor has recruited two investment managers, Ted Weschler and Todd Combs, to handle a proportion of Berkshire Hathaway’s equity portfolio.

This proportion will increase over time, making it likely that many of these moves are not those of Buffett, but the actions of Weschler and Combs.

During the quarter, the company increased its holding of a couple of US bank shares – Wells Fargo and Bank of New York Mellon, as well as media related businesses Viacom, DirecTV and Liberty Media. It also took a stake in US oil businesses National Oilwell Varco.

Loading the ‘elephant gun’

Buffett and his investment team are likely selling for a variety of reasons, including stretched valuations and eroding business quality, and redeploying some of that cash into their best ideas – a good tip for all investors.

However, Buffett recently revealed that Berkshire had considered a $22 billion deal, which didn’t end up going ahead, and which would have required a $22 billion payment. In last year’s shareholder letter, he wrote:

“We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

Buffett is unlikely to let the company’s cash pile fall much below US$20 billion, or if he did, only by a small fraction, and for a very short time. That Berkshire was a net seller of stocks last quarter, and that its cash pile continues to grow suggests that the Oracle of Omaha might just be reloading that elephant gun, ready for the next big target to appear in his sights.

Foolish takeaway

Small (well, relatively small for the world’s richest investor) changes in Berkshire Hathaway’s equity portfolio are almost certainly the actions of the company’s two investment managers, not those of Buffett himself, but the two men are accomplished investors. They are obviously seeing value in financials, media and oil companies — something investors should note.

That Berkshire continues to stockpile cash is likely a clear sign that Buffett is preparing for the next big deal, which could conceivably have up to a US$30 billion price tag.

The best deal for investors, however, may be Berkshire Hathaway, itself. Trading around only 1.15 times its book value, and backed with a share repurchase plan if the shares hit 1.1 times book value, Berkshire is cheap both on an absolute and historical basis.

You get the Oracle of Omaha and a portfolio of wonderful businesses thrown in — effectively for free.

If you’re looking for investing ideas, look no further than 2 Stocks Warren Buffett Wishes He Could Buy. The size of Warren Buffett’s company, Berkshire Hathaway, means his investment universe is now limited to very, very large businesses, but individual investors don’t have that limitation. Click here now to find out the names of two companies we’ve used Buffett’s own criteria to identify. But hurry – the report is free for only a limited time.

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Scott Phillips is an investment analyst with The Motley Fool. He owns shares in Berkshire Hathaway and Johnson & Johnson. You can follow Scott on Twitter @TMFGillaThe Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691)

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