Year to date Berkshire equity portfolios are demonstrating reasonable success versus their benchmark, as we’ve generated a slight positive return versus a market thats down slightly and choppy.

 On a security basis, about 2/3 of our selections are ahead of the market, with notable strength in selected financials, consumer staples, and domestic airlines. Stocks that are lagging the market include a major car rental concern and a domestic wireless carrier. In both cases we think the valuation/risk trade off still warrant ownership in our portfolio.

The relatively soft (but not disastrous) economic data released of late validates the average positioning of the portfolio. We are allocating client capital to big liquid companies with global footprints that we believe can generate high returns on capital, healthy free cash flow and dividend growth even in the face of economic headwinds. We believe the energy and commodity space do not possess this ability and earnings estimates are too high against the back drop of deleveraging, excess global capacity and tight credit.

Two companies in our portfolio made announcements this week.  

JPMorgan Chase (JPM) held an investor presentation whereby they articulated their outlook. The bank estimates its normalized earnings power is over $5.50 per share. We estimate, over time its true worth is over 10 times that number. The bank reiterated that provisioning remains adequate and credit conditions are stable to improving.  

Coca Cola (KO) announced their intentions to buy the North American operations of their largest bottler in a transaction valued at nearly $13 billion. The stock fell on the news. We think the transaction makes the company more capital intensive, reduces returns, and could weigh down earnings until 2012.  KO believes the model of simply collecting royalties by selling concentrate to its bottlers in an increasingly niche oriented and fragmented beverage market no longer makes sense. These products require more control over the bottling, marketing and distributions according to the company.   

 We welcome your comments and questions.

Disclosure:

Berkshire equity portfolios and Berkshire employee accounts have long positions in the stocks and sectors mentioned in this post. 

The views expressed in this commentary reflect those of Berkshire Asset Management, LLC (Berkshire) as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Berkshire disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Because investment decisions are based on numerous factors, these views may not be relied upon as an indication of trading intent on behalf of any portfolio. The information contained herein has been prepared from sources believed to be reliable, but is not guaranteed by Berkshire as to its accuracy or completeness.

References to particular securities are intended only to explain the rationale for the portfolio manager’s action with respect to such securities. Such references do not include all material information about such securities, including risks, and are not intended to be recommendations to take any action with respect to such securities.

Investment Risk: All investments are subject to risk, including possible loss of principal. Because Berkshire Asset Management, LLC’s investment style expects to hold a concentrated portfolio of a limited number of securities, a decline in the value of these investments would cause the portfolio’s overall value to decline to a greater degree than a less concentrated portfolio. Our equity investment style may focus its investments in certain sectors or industries, thereby increasing the potential vulnerability to market volatility.