It is interesting to go back and take a look at some of the smaller positions in Warren Buffett (Trades, Portfolio)'s equity portfolio at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). I like to look at these positions because they do not get as much attention as the larger holdings.
What’s more, positions of a small size that have been in the portfolio for a long time rarely get covered in the media. One of these is United Parcel Service Inc. (UPS, Financial).
A long-term holding
Buffet first acquired a position in the company in the fourth quarter of 2006 at an average price of around $75 per share. It has always been a relatively small position for the portfolio. Even in 2006, it had a weighting of just 0.2%.
Berkshire did not change the position at all until the second quarter 2012, when it started selling.
By the end of 2012, the position had been reduced from around 1.4 million shares to 59,400 shares.
It looks as if the conglomerate was selling the stock at around $75 per share, meaning it roughly broke even during the financial crisis (though some dividends may have been received).
Today, Berkshire still owns those 59,400 shares.
It has not made any changes to the position since 2012, but today the holding is worth $10 million, an insignificant amount compared to the $300 billion equity portfolio.
The position has performed relatively well since it was first acquired. Over the past 15 years, the stock has produced a total return of 7.1% per annum overall, compared to the freight and logistics industry average of 6.9%.
However, the overall U.S. market has returned 8.2% per annum.
A cheap, growing business
This is a good example of long-term investing and why leaving a good company alone to do its thing in a portfolio can produce attractive returns, even though those returns might not match the broader market.
UPS has not been the best-performing stock on the market over the past 15 years, but it has produced a positive annual total return of 7.1%. That is far more than investors would have been able to achieve from bonds or cash.
It is also important to note that today’s figures are a bit misleading because the stock is trading down heavily from its 52-week high of $232 per share. As such, one could argue that over the long term, returns from the stock should be in the double digits.
Over the past five years, it has reported an average return on invested capital of 21%.
Suppose we assume that, over the long term, equity returns match a company's return on invested capital. In that case, this suggests the total return of 7.1% per annum over the past 15 years really understates the company’s potential.
UPS is not going to achieve the same sort of returns as Apple Inc. (AAPL, Financial) or even Coca-Cola Co. (KO, Financial), but it is one of the three major commercial providers that dominate the small parcel delivery market space.
This is going to be even more critical in a world where e-commerce is becoming the go-to shopping experience for consumers. Building the kind of integrated global network UPS has would take huge amounts of money and time, and that is assuming the new brand can build trust with consumers in the same way UPS has been able to over the past couple of decades.
In some respects, this is a typical Buffett company. Its global footprint and reputation are both contributing to its competitive advantage. These are going to be difficult to replicate for any company that wants to try and take on the market.
And these advantages appear underappreciated, with the stock trading at a price-earnings ratio of just 13.5 as of the time of writing.
