It has been a long time for Buffett followers to see him buying options. Yesterday Warren Buffett's Berkshire Hathaway Inc said it has acquired options to boost its stake in Burlington Northern Santa Fe Corp, the No. 2 U.S. railroad, to 17.1 percent from 15 percent.
In a filing with the U.S. Securities and Exchange Commission late on Tuesday, Berkshire indicated that on August 30 and 31 its National Indemnity Co. unit acquired call options to buy 7.46 million Burlington Northern shares for $40 each. The shares have traded between $73.89 and $85.67 over the last month; today the shares closed at $ 82.19.
The options are exercisable on October 3, but Berkshire may extend this date to November 2 for an additional 21.5 cents per option, the filing shows.
Berkshire is now the largest shareholder of Burlington Northern, it already owns 52.98 million Burlington Northern shares. It informed Burlington Northern on August 28 that it might seek to boost its stake to 25 percent, according to an August 31 SEC filing.
Buffett is known for buying undervalued stocks of businesses with durable competitive advantage and holding them forever. It is interesting to see that Buffett is using options for shares of the company he wants to buy. We have not seen this during recent years. Buying options are rare among Gurus, however, Joel Greenblatt does use LEAP as his vehicles for the stocks he considers undervalued. He still owns large chunks of options on Wal-Mart (WMT) and American Express (AXP).
With too much money in hands, Warren Buffett’s universe of investment choice is shrunken to large companies only. That is one of the reasons why he has been buying companies like Wal-Mart (WMT), Wells Fargo (WFC), US Bank (USB) etc. "I've got an elephant gun, I just can't find the elephant.” He said during an interview. His purchases of railroad companies surprised a lot of his followers initially. During the Berkshire annual meeting in May, Buffett said that railroad business would never be "sensational," yet its prospects had improve. Charlie Munger, Vice Chairman of Berkshire Hathaway, commented during the annual meeting of Wesco Financial (WSC), Buffett and he himself “used to not like them because they needed large amounts of capital, had tough unions, and stiff competition from the trucking business. The paradigm had shifted. Now the railroad industry has a competitive advantage by double-stacking freight. With all of the imports from China , the U.S. has a huge amount of freight being sent across the county.”
In May Berkshire reported stakes in two other railroad companies: 6.36 million shares of Norfolk Southern Corp (NSC) and 10.51 million shares of Union Pacific Corp (UNP). Buying these railroad companies will help him to deploy some of his cash in hands.