Berkshire Hathaway on Monday offered a strong endorsement of five stocks it holds as part of discussions with regulators, saying it believes that Wells Fargo & Co., Kraft Foods, Sanofi-Aventis, Swiss Re and U.S. Bancorp are all undervalued.
Warren E. Buffett's company filed copies of letters it had exchanged with the Securities and Exchange Commission over the last several months.
Regulators had questioned whether Berkshire should write down the value of those investments because their stock prices had fallen since Buffett's company first bought the shares and remained below Berkshire's cost for more than a year. Berkshire resisted because company officials believe that all five stocks will rebound and that Berkshire has no immediate plans to sell them at the current lower prices.
Berkshire ultimately recorded an impairment of the value of its holdings in drugmaker Sanofi Aventis, reinsurance firm Swiss Re and banking company U.S. Bancorp at the end of 2010 to comply with accounting rules. Those changes were part of a $938 million write-down Berkshire recorded on its $61.5 billion stock portfolio in the fourth quarter.
One example of the price difference that concerned regulators can be seen in U.S. Bancorp's stock. Berkshire paid $2.4 billion for its stake in the company, which was worth $2.1 billion at the end of 2010 when the stock sold for $24.84. Monday, the stock was selling for $26.90.
But Omaha-based Berkshire didn't write down the values of Wells Fargo and Kraft. It made that decision even though at the end of 2010, it had an unrealized loss of about $384 million on some of its 359 million Wells Fargo shares and an unrealized loss of about $150 million on its 97 million shares of Kraft.
Berkshire said that it made sense not to write down its Wells Fargo holdings because the unrealized loss applied to only about 30 percent of its Wells Fargo stock. Berkshire said that it had an unrealized $3.5 billion gain on the other 70 percent of its Wells Fargo stock. Monday, stock in the banking giant closed at $31.61, down 33 cents.
Berkshire officials told regulators Jan. 11 that they remain confident that all five stocks were trading at levels below their true value and that the market price will eventually reflect that. "Berkshire's management is very confident that in time each security's market price will grow to at least the intrinsic value that existed at the dates of acquisition," wrote Marc D. Hamburg, chief financial officer for Berkshire.
Berkshire intends to continue holding all five of these stocks until their prices recover, Hamburg said.
Buffett, who is Berkshire's chairman and CEO, and other company officials did not immediately respond to a message Monday, but Hamburg briefly discussed the merits of all five investments in the letters.
Wells Fargo, U.S. Bancorp and Swiss Re were all hurt by the housing and credit crises of 2008 and the accompanying recession, but Hamburg said Berkshire believes that all three of those companies either maintained or strengthened their franchises so their earnings prospects look good.
Hamburg also said the prominence of Kraft's many food brands gives it strong potential for earnings growth.
He also said Sanofi has reported strong earnings in recent quarters, and its strong drug franchise gives it good growth potential.
Berkshire owns roughly 80 subsidiaries, including insurance, clothing, furniture, utility, jewelry and corporate jet companies. The company owns The Buffalo News, and Buffett is the newspaper's chairman. Berkshire also has big investments in companies such as Coca-Cola, American Express and the Washington Post.