Where Buffett's money is going now

By Morningstar

Although Berkshire Hathaway (BRK.A, news, msgs) made only modest changes to its substantial ($35 billion-plus) equity portfolio during the first quarter, based on data pulled from the company's latest 13-F filing with the Securities and Exchange Commission, we were encouraged to find more than a few five-star stocks in the company's holdings.

In fact, of the 41 securities in Berkshire's equity portfolio at the end of the first quarter, there were 13 stocks that are currently rated five stars by Morningstar's analysts.

Berkshire had fairly large positions in five of these securities, each of which accounted for 4% or more of the company's total equity portfolio. In one case, Berkshire's Warren Buffett and Charlie Munger were actually adding to a position they had trimmed substantially during the fourth quarter of last year. We'll delve more deeply into each of them as we discuss the moves Buffett and Munger made during the most recent quarter.

Shifts in Berkshire's portfolio

Berkshire didn't add any stocks to its 13-F portfolio during the first quarter of 2009, nor did it extinguish any holdings. The company did, however, add to its holdings in six securities. Berkshire built a larger stake in two railroad stocks, BNSF Railway (BNI, news, msgs) and Union Pacific (UNP, news, msgs), as well as two of its biggest bank holdings, Wells Fargo (WFC, news, msgs) and U.S. Bancorp (USB, news, msgs).

The largest increase in dollar terms was in BNSF Railway, which was a subject of some conversation at the company's recent annual meeting as well as in an article we published a few weeks ago. Buffett and Munger have long been leery of railroad investments, but not lately. They have cited how the economics of the railroad business have improved substantially over the years, in part due to the increased attractiveness of rail transport in terms of energy efficiency. Companies such as BNSF have been making significant investments in more-energy-efficient rail equipment.

As for the two bank stocks, Buffett expressed confidence at the company's recent annual meeting in the operating models of each of these organizations even with the stress and uncertainty facing the banking industry. While neither company was immune to the dissipation in confidence in bank stocks during the first quarter, when various indexes of bank stocks fell as much as 40%, Berkshire viewed it as a buying opportunity rather than a reason to run for the exit.

Bulking up on Johnson & Johnson

After considerably paring back its holdings in Johnson & Johnson (JNJ, news, msgs) during the fourth quarter (something we talked about when we looked at Berkshire's last 13-F filing), we were pleased to see the company adding back to its position in the first quarter. We've had Johnson & Johnson rated five stars, our highest stock rating, since October. Morningstar analyst Damien Conover likes the company's solidly branded research and distributional leadership position in attractive health care markets.

Conover notes that Johnson & Johnson controls the top or No. 2 spot in 70% of its products and that the company maintains a diverse revenue base, a robust research pipeline and exceptional cash-flow generation that together create a wide economic moat. Our fair-value estimate of $80 per share for Johnson & Johnson is well above the company's current stock price. Our low uncertainty rating on the company leaves it with a relatively narrow margin of safety and a "consider buying" price of $64 per share, which is also well above the company's current stock price.

In our view, Johnson & Johnson is a classic example of a wide-moat company that is currently undervalued by the market and that deserves a second look from investors.

Berkshire also continues to hold large positions in four other five-star stocks, which our analysts believe have solid long-term prospects:

Procter & Gamble

Morningstar analyst Lauren DeSanto believes that while Procter & Gamble (PG, news, msgs) has built its moat with product development and marketing, the company's strengths go beyond its skills in brand building. She believes the company's ability to consistently reinvent itself and refocus on improving its capabilities will serve it well in the current environment.

Companies with moats as wide as Procter & Gamble's have greater resilience as their structural competitive advantages show through during periods of weakness, and DeSanto expects the company to take full advantage of the slowdown in the global economy to not only improve the productivity of its operations but also to take share from competitors.

Kraft Foods

Morningstar analyst Erin Swanson believes Kraft Foods (KFT, news, msgs) is reporting decent results despite being in the midst of a consumer-led recession, which might indicate the company is finally benefiting from its continuing investments in product innovation and marketing, as well as improvements in its product portfolio.

Kraft's powerful brands (each of which generates more than $1 billion in annual sales) include Nabisco, Oscar Mayer, Maxwell House, Philadelphia (cream cheese) and Oreo. Although the road ahead could be bumpy, Swanson believes Kraft's investments in its brands and its expansive global network will allow it to continue producing solid cash flows and impressive returns for shareholders.

Continued: 2 more big names and 2 cuts

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