The companies most appealing to Russo currently are those in Europe that have emerging market growth, invest sacrificially in growth at the expense of short-term performance and have valuations that fit his definition of “50-cent dollars.” Extremely long-term investing periods also characterize his portfolio.
Berkshire Hathaway (BRK.B)
Russo purchased 129,705 shares of Berkshire Hathaway for $85 per share on average in the third quarter, bringing his total holding size to 2,012,001 shares. He has owned the position since before 2007 and has added to it each consecutive quarter since 2009.
Russo recently commented on the position in a Bloomberg interview in May:
“It’s a 10% position. I think it’s a very offensive position. The shares are compressed in valuation because there’s been so much worry over the direction long term for Berkshire, and I think they’ve put into place so many ways in which investors can win going forward that it’s an important position for us at around 10%.”
According to Berkshire’s third-quarter report released Nov. 2, its operating earnings for the first nine months of the year were $9.8 billion, increased year over year from $8.1 billion. Net earnings increased year over year to $10.3 billion from $7.2 billion. Revenue increased year over year to $117.7 billion from $105.7 billion.
In the Bloomberg interview, Russo expressed hope that Berkshire would repurchase its shares, increasing his position size in the company. Berkshire has not yet repurchased any shares, but authorized a share repurchase program in September 2011 at prices no higher than a 10% premium over its per-share book value.
Berkshire currently trades for $87 per share, which is close to its three-year high, and has a P/S ratio of 1.9, a three-year high. Its P/E ratio is 16.3 and P/B is 1.2.
BRK.B data byGuruFocus.com
Wells Fargo & Co. (WFC)
Russo purchased 660,591 shares of Wells Fargo for $34 per share on average in the third quarter, bringing his total ownership to 10,708,150 shares. The holding predates 2007, and he has been adding to it each consecutive quarter since mid-2010.
Wells Fargo is a financial services company with $1.4 trillion in assets and offices in more than 35 countries, and whose customers are on in three households in the U.S.
In the third quarter, Wells Fargo achieved its sixth consecutive quarter of record net income and EPS, which reached $4.9 billion, or $0.88 per diluted common share, a year-over-year increase from $4.1 billion, or $0.72 per share. Revenue was $21.2 billion, almost flat year over year from $21.3 billion due to approximately $300 million in increased noninterest income which was more than offset by lower net interest income.
The bank’s net interest income was $10.7 billion, a year-over-year decline from $11 billion, driven primarily by lower income from variable sources. The was more strongly capitalized in the third quarter, with Tier 1 common equity at 10.06%, compared to 9.34% in the same period the previous year.
The P/E, P/B and P/S are 10.7, 1.1 and 2.1, respectively.
WFC data byGuruFocus.com
Nestle SA (NSRGY)
Russo increased his Nestle stake by 675,721, his greatest expansion since he started the position in the first quarter of 2011, for approximately $61 per share on average. This quarter his stake in the company reached 11,656,336 shares.
Nestle, a major global health and wellness company, aims for 5% to 6% organic growth, improved trading operating profit margin and underlying earnings per share in constant currencies and improved capital efficiency.
Russo commented on his Nestle holding, which comprises more than 11% of his funds, at length at the October 2011 Value Investors Conference:
“So in the case of Nestle the appeal is this brand portfolio, and these brands are familiar, trusted and already ubiquitous globally. When I visited our South African breweries operations in the remotest part of Angola and you go to a village, which is an extremely undeveloped part of the country, you will see any number – you’ll probably see Maggi will certainly be there; Carnation will be there; depending on how advanced the country is you’ll have this milk product called NAN. But it’s there, it’s available and what Nestle is waiting for as are the other global companies that we have, is they’re waiting for the company to have migration and GDP from the left to the right, so as the countries move up the scale in terms of development then they have more money to spend, so you’ll draw people out from subsistence level living – where they’re providing for their own needs and nothing’s really processed – to processed products which Nestle can start participating in and then process branded and then process branded with a higher price and higher prestige, until the very far right upper corner where we become aspirational.
But this process is under way in parts of the world that are probably 2 and a half or 3 billion more in total numbers of people than 20 years ago. And that’s really what I try to tap into through the global companies that we’ve invested in.
It’s an interesting thing that consumer disposable income at the start grows much faster than GDP, because what you’re seeing in the markets that are just developing is you’re seeing people who are coming into the workplace for the first time. And so in India today there’s still over 500 million people living outside of the urban area. They’re still largely in the age of subsistence farming. But as GDP grows, they’re pulled from that level of existence into a monetized relationship with someone. That someone today typically – from the parts of the world that we trade in – is typically Chinese in some fashion or another. So if it’s in Africa today it’s going to be some form of Chinese company that’s developing something in their great reach for resources, and they’ll build roads and they’ll do any number of things, and they’ll bring people into the economy, and those people with cash for the first time, start to have disposable income.”
Nestle’s first nine months of 2012 met management’s guidance and included double-digit growth in emerging markets, where it is expanding its routes to market and enhancing its product offerings. Its continued growth momentum allowed it to confirm its full-year outlook.
Organic growth at Nestle was 6.1% in the first nine months of 2012, with 2.9% being real internal growth and 3.2% being from pricing, and grew in all of its global regions. Nestle expects organic growth of 5% to 6%, improved margins and underlying earnings per share, in the full year.
MasterCard Inc. (MA)
Russo purchased 43,945 shares of MasterCard for approximately $432.50 per share in the third quarter, his largest purchase of the stock since the second quarter of 2011. After establishing the position in the third quarter of 2008, when it traded for $234 per share, Russo added to it for each consecutive quarter.
Russo mentioned the appeal of MasterCard’s European exposure in a Barron’s interview from June:
“Barron's:Your portfolio looks like few others, with its exposure to European companies. How did it get that way?
Russo: The best way I've found to participate in the growth of developing markets is through European companies whose brands have been present but unaffordable in those markets, and whose managements are willing to redeploy Western-market cash flows into the expansion of those brands in the developing world, where the tastes already exist, the preferences already exist, but affordability hasn't.
Which companies meet this test?
A perfect example is Nestlé. Another is Philip Morris International [ticker: PM]. In the spirits industry, it would be Pernod Ricard, Diageo [DEO] and Brown-Forman. In beer, Heineken, Anheuser-Busch InBev (BUD) SABMiller (SBMRY). And in payment systems, MasterCard (MA).”
In the third quarter, MasterCard’s net revenue increased 5% year over year to $1.9 billion, driven by increases in gross dollar volume on a local currency basis, processed transactions and cross-border volumes. Net income rose 8% to $772 million, and earnings per share 10% to $6.17.
Emerging market growth was strong, and “continue to provide great opportunities for growth,” the company’s president and CEO, Ajay Banga, said in the company’s third quarter release dated Oct. 31.
The company expended $216 million in the third quarter repurchasing about half a million shares and has $1.1 billion remaining under its most recent repurchase authorization valued at $1.5 billion.
See more of Tom Russo’s in his portfolio here. Also check out his undervalued stocks, top growth companies and high yield stocks.