How frequently has Warren Buffett  been bashed by the media over Berkshire Hathaway Inc.’s  (NYSE: BRK-A) lackluster performance ?  What was interesting to see is his stake being lowered in Moody’s Corp. (NYSE: MCO).  The only thing that was surprising to us was that it took the Oracle of Omaha this long to begin selling these shares.  Because Buffett is such a large stakeholder, we do expect that he’ll always hold some shares.  Conversely, we think he’ll continue to lighten up his stake in Moody’s.  Along those lines, we reviewed Buffett’s holdings and found several more stocks that he might want to consider selling some or all of his stake.

Some of these positions could include ConocoPhillips (NYSE: COP), Constellation Energy Group, Inc. (NYSE: CEG), Gannett Co. Inc. (NYSE: GCI), Washington Post Co. (NYSE: WPO), M&T Bank Corp. (NYSE: MTB) and WABCO Holdings (NYSE: WBC).  There are others, such as his stakes in drug and health care sectors that could have been mentioned, but those big directional bets may have to wait until after health care reform is enacted.   As you will see, we listed the reasons that Buffett should or could cut the stakes.

On the Moody’s (NYSE: MCO) model, the new regulation is going to create a crippling impact on its business.  Being paid by a company or a municipality to analyze and rate that same entity is a conflict of interest.  That is what penny stocks have gotten in trouble for time and again. New regulation is going to keep these firms from doing some of the added consulting business, and that is going to bite down on these ratings agencies.  And missing the whole mortgage blow-up?  Moody’s can’t exactly call a do-over and it cannot claim they were misled by every aspect of the chain when they handed out all those Triple-A ratings for some of the junkiest classes of CDO’s and other securitizations.  Frankly, the only positive development here is that Moody’s and the other ratings agencies were not abolished.  They still have relevance, but they arguably have a much smaller revenue stream on the surface.  So we wanted to apply some of the significant changes in industries and companies that Buffett holds inside Berkshire Hathaway to see which companies Buffett should clip down.  The writing was on the wall for so long that shares fell by more than two-thirds in less than 18 months.  We think Buffett will be taking this stake down considerably.

Based upon the market of late, share prices alone cannot be the only yardstick used to measure these.  Particularly since Buffett believes you want to be greedy when everyone is fearful.  These stake sales could even raise capital if Berkshire needs it.  With all the calls for a second stimulus package, we took this as a signal that Buffett was guiding down operational forecasts for what to expect inside his operating companies and in many of his holdings.

The first and most likely position Buffett could cut is ConocoPhillips (NYSE: COP).  We already noted in his last report of full holdings that Conoco is really lower than the 71.228 million reported.  Buffett even came out and said he made a huge mistake and this stock was going to be used for cutting taxes.  To us, the only question comes down to whether the Oracle of Omaha cuts the stake down to under 20 million shares or if he pulls the plug on the entire lot.  Frankly, this one does offer significant upside if and when energy prices return to loftier levels and we think Buffett should hold on to the stake.  The issue is that he’s already said he’ll probably more of these shares even if they rise.  Buffett could still capture another $2 billion in capital here if he just took his stake down to right under 20 million shares.

Constellation Energy Group, Inc. (NYSE: CEG) has been a fluke of a stock for Berkshire.  Buffett won this as a poker game collateral pledge after Berkshire Hathaway’s MidAmerican Energy tried to buy Constellation.  It received about 20 million shares in the break-up as a deal termination fee after Constellation went with a rival deal from EDF from France in a joint venture instead.  Buffett has already cut this, and we saw filings showing this was a smaller stake of about 12.4 million shares rather than the 14.8+ million as of the last filing date.  In the Constellation stake, Buffett could bring in roughly $365 million in new cash.

Gannett Co. Inc. (NYSE: GCI) and Washington Post (NYSE: WPO) are in the same boat.  Buffett made a media bet and he has been riding a horse than cannot or has not been able to fight the tide.  He has even panned newspapers and some traditional media in an interview as having a model that is on a race to zero.  If this is true then the only question is why Buffett has stuck with these.  It is not as though Buffett needs them to stay friendly to Berkshire Hathaway.  On the Gannett stake, that is 3.447 million shares that would fetch some $20.3 million today.  Frankly, that small of a stake is not worth his time even if he thinks media is coming back.  The Washington Post stake is more interesting because it has held up better than most in media because it has education sales rather than just pure media. Berkshire entities hold over 1.72 million shares, so this could raise almost $700 million.  While we list this here as ones that Buffett could sell, the old guy might have a change of heart and buy more while these are at basement prices.  With Buffett owning Business Wire, does he need the content side when he owns the premiere distribution side?  The estimated intake from these two today would bring in $720-ish million in cash.

The 6.71 million shares of M&T Bank Corp. (NYSE: MTB) listed under Berkshire Hathaway’s holdings is one that M&T’s management probably does not appreciate us calling out as a sell-candidate for Mr. Buffett.  In fact, we have no call against M&T personally nor do we have anything against it today even as a stock on a standalone basis.  The problem here is that Buffett’s circa-$390 million value in this holding is dwarfed by a $7.25 billion stake in Wells Fargo.  With his other banking and financial holdings, Buffett’s need for this one is not apparent.  We have heard Buffett talk about Wells Fargo over and over as a great bank but have not heard a peep about M&T in any recent years.  Add in his recent deal with Goldman Sachs, and that will leave you with Buffett’s new model in investing in financial institutions.  The sale of this stake would allow Buffett to bring in close to $390 million.

WABCO Holdings (NYSE: WBC) is still a 2.7 million share stake.  The company is tied to autos, but not entirely tied to the US-auto sector.  It is primarily in safety and control systems for commercial vehicles,  particularly on breaking systems.  The market cap is a mere $1.3 billion, so the question to ask is just how much Buffett and friends can pocket here even if this is the Holy Grail in the commercial auto parts sector.  This “Berkshire Sell” notion is not tied to the auto sector, but we just don’t see how this stake is worth Mr. Buffett’s time or effort.  If he wants to have exposure in various aspects of the auto sector, he could go into one of the larger government-backed or one of the other players and invest higher in the capital structure.  If Buffett were to cut this one out of his portfolio, he’d bring in roughly $54 million in cash.

Let’s pretend Buffett unloaded all of these positions.  The tally in just these positions would raise close to $3.5 billion in cash.  Some of these positions are essentially legacy positions.  Buffett has also been going higher up into the capital structure in many of his recent investments so he is above the common stock holders.  He could immediately use the funds to buy more of some other smaller holdings he would like to add to.  Or he could add it into the till for that “whale of a deal” he had previously telegraphed that he would like to pursue.

You can always join our open email distribution list to get reminders about Buffett, IPO’s, mergers, secondary offerings, daily analyst calls and more.  As always, here is the full list of Buffett holdings.  We expect that to change in roughly three weeks.

Jon C. Ogg
July 27, 2009

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