Warren Buffett has made several moves this year. He invested the most in at least 20 years, with the exception of 2008 when he did something similar.
In the last third quarter he invested $23.9 billion to broaden his portfolio beyond consumer and financial companies.
The company bought near $7 billion vis-à-vis the $3.62 billion and the $834 million in the second and first quarter, respectively.
These investments involved an increase of Buffett's stock holdings in commercial and industrial companies, thus surpassing the holdings in financial and consumer-product firms.
Some of these moves include new stakes in MasterCard Inc (MA) and Dollar General Corp (DG), which will be examined with some more detail below; $6.9 billion in equities, $5 billion in preferred shares and warrants in Bank of America (BAC) and the acquisition of Lubrizol Corp for nearly $9 billion.
There may be some other investments that were not disclosed. It is known Warren Buffett has permission from the SEC to not disclose every movement and investment he makes to avoid affecting the stock price in the market.
Stock investors are really surprised at this. They have never expected Buffett would make such a move, especially when all his picks are doing great. Some consider that, as he is reaching the age of 80, he is preparing his legacy.
Anyway, the purpose of this article, apart from describing what Warren has been doing lately, is to analyze why he bought positions in the following three companies.
Dollar General: this chain of stores in the US has shown strong results in the lasts quarters. Its P/E ratio has been 19.28x and sales have increased 11.2%, thus reaching $3.58 billion to $3.21 billion in the same period last year. But that´s not all. Store sales have increased by 5.9% this quarter, and the operating income raised 16% to $350 million, vis-à-vis the $301 million in the same quarter last year. Least but not last, interest expenses have declined by $8 million in relation to the expenses registered in the same quarter last year. Finally, Dollar General is expecting to launch its e-commerce site, not only to gain access to the e-market but also to offer exclusive products that will not be available at the stores.
Verisk Analytics (VSK): this is a proprietary data, analytics methods, and embedded decision support solutions provider to property and casualty insurance, mortgage, and healthcare industries in the US. Shares trade at $32 and EPS are expected to reach $1.64 and $1.88 in 2011 and 2012 respectively. Furthermore, Verisk has a very important pricing power which is instrumental particularly in an inflationary environment and is characterized by non charging high prices to customers.
MasterCard: Despite the financial crisis that has remarkably affected the firm, MasterCard has been able to increase 30% in the last year. Since 2006, when it went public, shares are 521%. In the last five years, earnings have been growing at a pace of 48%, cash flow at an annualized rate of 40% and revenue, almost 14%. Moreover, MasterCard is planning to make investments in prepaid cards and mobile payments to boost said segments.
Now, I ask myself, why has Warren turned his attention to these three picks? These companies' shares are neither cheap nor expensive. So there's something else he saw in them.
As regards Dollar General, he might have analyzed that a chain of stores offering bargains in its products is probably an inexpensive firm with a strong management and good results.
What about Verisk? I think that Berkshire Hathaway experience in the insurance industry places it in a good position to judge the company´s business fundamentals, particularly when the former operates in the same industry.
Finally, in the case of MasterCard, I think that Buffett increased his position in the company not only because he already knows how the industry works (apart from the stake he already holds in the company, he also holds shares in American Express) but also because it is not likely that the credit card segment will have new competitors.
All in all, I believe Warren prefers to buy a good company at a fair price than a fair company at a good price.