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Rupert Hargreaves
Rupert Hargreaves
Articles (1407)  | Author's Website |

Has Buffett Become an Expert on Big Pharma?

A look at the conglomerate's recent 13F filing

Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) filed its 13F report for the third quarter on Monday this week. The announcement revealed that the Oracle of Omaha made some exciting changes to his portfolio during the reported period, including several investments in pharmaceutical companies.

Before we continue, investors should note that this filing only provides a snapshot of the portfolio at one point in time. It details the equity positions in the portfolio as of the end of September 2020. It does not include any cash or credit holdings or any changes made after the quarter ended.

Berkshire's portfolio team

While some report the portfolio moves of Berkshire as if only Buffett himself had initiated the trades, that is often not the case. In recent years, Buffett has been increasingly letting his portfolio managers, Todd Combs and Ted Weschler, take on more work.

Combs and Weschler now manage several billion dollars worth of Berkshire's investments. Any smaller movements in the portfolio are likely to have been completed by them rather than Buffett. As far as we know, Buffett still has yet to give the green light for them to make any trades over $1 billion.

So, this is the threshold I think investors should be looking out for. Even though it might be the case that Buffett has only approved the deal, we can safely speculate that any trade over the $1 billion mark had at least some input from the Oracle. Anything below, and it's possible he made no input whatsoever.

Berkshire's portfolio changes

One of the changes that attracted the most attention in the portfolio in the second quarter was the addition of Barrick Gold Corp. (NYSE:GOLD). Some commentators speculated that the addition of this stock to the portfolio was a sign that Buffett was finally coming round to the idea of gold as a store of wealth.

As it turns out, this position only seems to have been a short-term trade. Berkshire reduced its stake in the gold miner by a little over 40% to 12 million shares in the third quarter, giving it a 0.15% portfolio weight at just over $330 million.

Other positions that were also substantially reduced include financials JP Morgan (JPM), Wells Fargo (NYSE:WFC) and PNC Financial Services (NYSE:PNC). The Wells Fargo holding was cut by just under 50% to 127 million shares, giving it a 1.3% portfolio weight, although the holding is still worth just under $3 billion.

Berkshire's investment in Apple (NASDAQ:AAPL) was also marginally reduced by 4% during the quarter, although it is still by far the largest holding, making up 48% of the $229 billion equity portfolio at the end of September.

In addition to the above movements, some large $1 billion-plus investments were added to the portfolio during the three months to the end of September. Key additions were Merck & Co (NYSE:MRK), AbbVie (NYSE:ABBV), Bristol-Myers Squibb (NYSE:BMY) and Pfizer Inc. (NYSE:PFE). Pfizer was the smallest investment; Berkshire acquired just $136 million worth of shares in the pharmaceutical giant during the period. All of the other holdings averaged around $1.8 billion in size, giving them on average a 0.8% portfolio weight.

What's interesting about these positions is the fact that in the past, Buffett has said that he's not interested in the pharmaceutical sector because he does not understand it. This suggests that he either feels he gained a more detailed understanding of the industry in recent months (entirely possible) or the positions were initiated and/or advised by another fund manager.

It may have been the case that Buffett has spent time getting to know the pharmaceutical sector over the past few months in detailed conversations with his pal Bill Gates (Trades, Portfolio) and, as a result, has decided to buy into these equities. It will be interesting to see if he comments on the positions in a later interview or letter to shareholders.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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Gabrieleteisa - 3 months ago    Report SPAM

Most of all, some of Big Pharma have very high debt (i.e. Abbvie) and valuations aren't so cheap to justify lower quality. I think they are decent investments, but not great. I'd really like to know what exactly he sees in them

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