... and a Buffett Bet on Wal-Mart?

04/08/2005 12:00 am EST

Focus:

Don Phillips

Managing Director, Morningstar, Inc.

"Pontificating on potential Berkshire Hathaway investments is an enjoyable hobby for several of our analysts,"says Dreyfus Neenan, research analyst with Don Phillip’s Morningstar. Here, he speculates on a surprising "potential" Buffett buy - Wal-Mart.

"Investors have much to gain from the insights in Warren Buffett's annual shareholders letter. We'd like to share three less-obvious insights we gleaned from his report. Buffett's explicit advice for investors was to try and avoid excitement (excessive trading) and expenses (additional, voluntary fees and taxes from that trading). Fair enough. But Buffett also actually demonstrates a much better strategy: when an attractive margin of safety is available, buy shares in companies that will consistently augment their value over time.

"A large contingent of armchair experts pontificate on Berkshire's potential stock investments, and while we don't consider this relevant to any serious Berkshire investment appraisal, it is an enjoyable hobby for several Morningstar analysts. So here's our speculation: Berkshire might be buying a sizable stake in Wal-Mart Stores (WMT NYSE). How did we read the entrails?

  • Clue #1: In January 28, 2005 with students at Vanderbilt University, Buffett noted that he was currently investing several billion into a stock. Wal-Mart is certainly large enough for this.
  • Clue #2: In his 2003 letter, Buffett praised Wal-Mart's honesty when describing Berkshire's McLane acquisition.
  • Clue #3: At the 2004 Berkshire annual meeting, Buffett admitted he had previously erred in not buying Wal-Mart, having abandoned a prior effort because the price moved up a little. Passing up a growing wide-moat company ranked high on Buffett's self-confessed list of errors.
  • Clue #4: In referring to Berkshire subsidiary Garan in the 2004 annual letter, Buffett recommends purchasing the product at Wal-Mart, even though Garanimals are widely available elsewhere. Berkshire's annual meeting consistently demonstrates that Buffett is a master merchandiser. Perhaps he now has a vested interest in boosting Wal-Mart sales beyond the obvious benefit to McLane.

"Ultimately, it doesn't matter if we're right or wrong on Wal-Mart. Thinking through a simple exercise helps us evaluate Wal-Mart the way Buffett would. Wide moat? Check. Good stewardship? Check. Attractive growth prospects? Check. Available at a discount to fair value? Check (well, almost). Did we gain a useful perspective on a potential investment? We'd have to say yes, and that's the point. Learning to think about stocks in the same way as one of history's most talented investors may well prove to be one of the best investment strategies there is."

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