Berkshire Hathaway shareholders hoping for major purchases of publicly traded stocks during the market meltdown of the first quarter are likely to be somewhat disappointed by the details of the 13F Report that the company submitted to the SEC this afternoon.  The report shows that Berkshire made relatively small purchases during the first quarter in Burlington Northern Santa Fe, Johnson & Johnson, Nalco Holdings, US Bancorp, Union Pacific, and Wells Fargo while trimming positions in CarMax, Conoco Phillips, Constellation Energy, and United Health Group.

Please note that the 13F report only covers holdings that trade in the United States.  The report includes shares of foreign issuers only if those shares are held as ADRs that trade on a United States stock exchange. Shares that trade on foreign exchanges are not reported on this form.  Therefore positions such as POSCO, Swiss Re, Tesco plc, and BYD are not covered in this analysis.

Let’s take a closer look at Berkshire Hathaway’s portfolio changes during the first quarter as well as examine the likely performance of the portfolio during the first half of the second quarter.

Banking

Berkshire added 1,488,000 shares of US Bancorp during the quarter which is a small increase of 2.2% to the position held at 12/31/2008.  Berkshire also purchased 12,364,344 shares of Wells Fargo during the quarter.  This represents an increase of 4.3% compared to the number of shares held at 12/31/2008.  The report does not indicate the purchase price of the shares that were added during the quarter.

It appears that Warren Buffett was able to act on his convictions regarding the banking sector during the quarter when he made comments that were very close to an outright buy recommendation, as I pointed on in an article on March 11.  However, the purchases as a percentage of shares already held at the start of the year are relatively small. Berkshire has some restrictions in terms of the percentage of a bank holding company that it is allowed to own and perhaps this consideration prevented additional purchases.

Railroads

Berkshire purchased 6,687,200 shares of Burlington Northern Santa Fe and 652,000 shares of Union Pacific during the first quarter.  This increased Berkshire’s share ownership of Burlington Northern by 9.5% and Union Pacific by 7.3%.  Burlington Northern Santa Fe is a very significant position for Berkshire, valued at $4.6 billion at the end of the first quarter and $5.2 billion at the close of trading today.  I do not believe that this holding is necessarily a vote of confidence in a quick economic recovery based on comments made at the Berkshire annual meeting.  However, it does appear to be a statement in favor of the view that the United States will escape a lost decade or a “Great Depression” scenario.

Health Care

Berkshire added 3,897,300 shares of Johnson & Johnson during the quarter which only partially reverses the liquidation of J&J shares during the 4th quarter of 2008.  According to Warren Buffett’s comments at the annual meeting, part of the J&J position was liquidated during the final months of 2008 to purchase the preferred stock in General Electric and Goldman Sachs.  The purchases in early 2009 demonstrate that the earlier liquidation was driven by the more lucrative opportunities available during the remarkable events of September and October rather than due to negative sentiment toward J&J as a business.

Berkshire sold 1.8 million shares of United Health Group during the first quarter.  Based on the manager codes in the report, I suspect that this position is controlled by Lou Simpson rather than by Warren Buffett.  While many observers attribute all of the positions in the report to Warren Buffett, certain positions are controlled by Lou Simpson who is responsible for GEICO’s portfolio.  Positions related to GEICO can be identified by manager codes 10 and 11 in the report.

Conoco Phillips

As I pointed out in my coverage of Berkshire Hathaway’s Q1 results last week, Berkshire has announced an intention to liquidate much of the Conoco Phillips position that was acquired during 2008 at much higher prices.  An impairment charge was taken during the first quarter given that Berkshire has announced an intention to liquidate the position.  This resulted in a mark to market loss that pushed Berkshire’s net income into negative territory for the quarter, although the losses in Conoco were already largely reflected in Berkshire’s book value at 12/31/2008.

During Q1, the 13F report shows that Berkshire liquidated 8,668,177 shares during the quarter.  This is computed by comparing the prior 13F report showing the position at 12/31/2008 with the current 13F report showing the position at 3/31/2009.  However, this computation does not match the statement in the Berkshire news release that accompanied the Q1 results on May 8.  The news release stated that 13.7 million shares were sold during the first quarter.  I am not sure what accounts for the difference between these figures.  However, it is clear that Berkshire has begun the process of liquidating the position in order to harvest tax losses that can be used to offset prior year capital gains.

While it would have been better to have never entered into the position, there are worse things than making lemonade out of lemons and Berkshire should at least recover some tax payments from prior years as a result.

Berkshire’s Portfolio Recovers Strongly in Q2

If we assume that the positions held at 3/31/2009 were held constant over the past six weeks, it appears that Berkshire’s portfolio is up approximately $7.7 billion, or 18.8%, so far this quarter.  The Standard & Poor’s 500 advanced 10.65% during the same period while Berkshire’s share price (A shares) has advanced by 2.8%.

While the market price of securities over a period of six weeks is meaningless, the results show that Berkshire’s heavy allocation to financials has helped results in a dramatic way.  It is also worthwhile to note that the decline in Berkshire’s book value shown in the Q1 report is likely to be entirely reversed based on results during the first half of the second quarter.

I have prepared a spreadsheet consolidating the information found in the past two 13F reports showing positions held at 12/31/2008 and 3/31/2009.  In addition, I have provided quotations at the close of business today along with the change in value of positions held at 3/31/2009 assuming that there have been no further purchases or sales in the second quarter.  I have double checked the spreadsheet and believe all data to be accurate.   If anyone notes any discrepancies, please bring it to my attention.