The famed stock chooser reveals a new stake in a Korean steelmaker and a deeper investment in the British grocer Tesco
Critics sneered at Warren Buffett's bet against the dollar in 2005, but he might have the last laugh. The investment guru continues warning about the U.S.'s ballooning current account deficit as he increases his exposure to companies that do business overseas - and now he's making money. After Berkshire Hathaway (BRK) revealed Mar. 1 that it had invested recently in South Korean steelmaker Posco (PKX) and boosted its stake in the British retailer Tesco PLC, both companies' share prices rose on Mar. 2. Buffett is also building large positions in two other companies he declined to name.
Buffett, the founder of the insurance and investment company, lost $955 million on Berkshire Hathaway's investments in foreign currency contracts in 2005. But his total gain since the inception of the position in 2002 now amounts to $2.2 billion, according to his annual letter to shareholders, which was released Mar. 1. Between market gains and new additions to the portfolio, the market value of his portfolio gained nearly $20 billion last year compared to 2005.
After acknowledging to investors at a shareholder meeting in the spring of 2006 that his foreign-exchange bet was too costly, Buffett has since come close to eliminating the bet that had recently dogged him. But he hasn't changed his point of view on the dollar. "As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high," he wrote in the letter.
Instead Buffett keeps increasing his exposure to foreign companies or multinationals doing business overseas. He bought an 80% stake in the Israeli metal-cutting equipment maker Iscar Metalworking for $4 billion in May, 2006, for example.
Buffett also held a 4% stake in Posco as of Dec. 31. The company dominates the Korean market for flat-rolled steel and controls around 75% of the country's production, according to Morningstar. It can ship steel to China in one day, unlike rivals based in countries such as Russia and Brazil. With a labor force that works six days a week, Posco routinely posts operating margins above 15%. "Investors looking to diversify into some international holdings could do a lot worse than Posco," Morningstar analyst Scott Burns said in a research note Jan. 17.
After the news about Buffett's investment, Posco shares rose 1.4% to $92.73 on heavy volume in afternoon trading Mar. 2 on the New York Stock Exchange. Posco shares surged nearly 6% before the opening bell, on news of the Berkshire interest.
Investors also bid up Tesco, which gained 2.1% on the London Stock Exchange, after Buffett reported holding a 2.9% stake in the British retailer. That was more than double the stake that was disclosed in previous regulatory filings.
The famed investor first bought shares in Tesco last year after the Cheshunt, England-based retailer said it would open "Fresh & Easy" convenience stores in several western U.S. states. The initial stores will be in Phoenix, Las Vegas, Los Angeles and San Diego, with Tesco planning to spend $2 billion through 2011 on the concept. The company already operates in 12 markets outside the U.K.
Tesco shares also were boosted by a Mar. 1 upgrade by Morgan Stanley, (COP), with analyst Nick Coulter arguing that Tesco's international operations are undervalued. Tesco also faces favorable prospects for its U.S. venture, according to Morgan Stanley.
"What’s not to be excited about? One of the best global retailers is entering the largest consumer market in the world with a concept designed to fall between the existing food retail
categories," Coulter wrote.
Tesco and Posco are among the most recently known to make the list of Buffett's major holdings, or those with market value of more than $700 million. Of those companies identified in Buffett's annual letter for 2006 that had not been major holdings in 2005, most derived a large share of their business outside the U.S. For example, Buffett holds a 1.1% stake in ConocoPhillips (COP), the integrated oil giant based in Houston, but operates in more than 40 countries. He owns about 0.7% of Johnson & Johnson (JNJ), which operates in 57 countries and sells health care products throughout the world. Berkshire also has a 19% holding in Chicago's USG Corp. (USG), which makes building materials in the United States, Canada, and Mexico. In one less international holding, Berkshire also expanded its position in US Bancorp, (USB) and now holds about 1.8% of the Minneapolis-based regional bank.
As for two mystery securities Berkshire added to its roster of major holdings this year, they have a market value of $1.9 billion and Buffett continues to buy them. "I could, of course, tell you their names," Buffett wrote. "But then I would have to kill you."