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AAA) Warren Buffett Watch - Global Economy Rattles The Nervous

Since the 50-for-1 split on Jan. 20, Warren Buffett's Berkshire Hathaway B Shares (BRK.B-N has been on an upward trajectory as investors pile into the firm in hopes of gaining access to the mind of the savviest investor around. From the day of the split to Feb. 3, BRK.B has jumped over 6 per cent, while the rest of the S&P has dipped over 3 per cent. Class A Berkshire (BRK.A-N shares have gained throughout the period as well, jumping 7 per cent.

Aside from the strong returns, the reduced price of the Baby Berkshires has led to a staggering increase in volume. Prior to the division, high prices kept BRK.B volume light. However, on Jan. 20, the day of the split, BRK.B's volume jumped to over 1.2 million shares, more than double of the previous day. At one point since the split, the single-day volume nearly reached 2 million shares.

This popularity is expected to continue after the S&P 500 recently announced that Berkshire Hathaway officially met its requirements for inclusion to the index and will be added to it in the near future.

With prices still within the reach of the average investor, it may be time to consider adding Berkshire B Shares as a small position in a well-diversified portfolio. Time is of the essence, however, because of the popularity of the stock and the fact that Mr. Buffett has said that no additional shares of BRK.B would be issued in the future.

Though it will soon find its place in the S&P 500, Berkshire Hathaway is considerably different from the many of its peers. When buying BRK.B, you are not buying a single entity. Rather, holding Berkshire is akin to holding a basket of companies Mr. Buffett has taken bets on during his impressive investing tenure.

Therefore, as in the case with ETFs and mutual funds, investors need to be aware of what companies they are getting into before getting their feet wet. Looking at Mr. Buffett's most recent holdings report, it quickly becomes apparent that the company has a huge percentage of its portfolio dedicated to its top two holdings: Coca-Cola (KO-N) and Wells Fargo (WFC-N. Currently, over a third of Berkshire Hathaway's portfolio is dedicated solely to these two companies.

As with other financial instruments with top-heavy weighting, investors are particularly vulnerable to any violent market swings. If either of these top companies takes a considerable hit, there could be a gut-wrenching drop.

Credit Ratings Drop

S&P's cut is in reaction to Berkshire's recent purchase of the rest of the Burlington Northern Santa Fe railroad for $26 billion. The deal underscores how big of a bet Berkshire is making on the acquisition, according to S&P's report.

There's little immediate financial loss to Berkshire by losing the AAA rating, which is mostly a point of pride for companies, as the interest rate investors are paid on debt issued by AAA-rated companies tends to be very close to debt from AA+ companies.

Still, investors are taking note of the downgrade as a rare case where Berkshire isn't perfect anymore. Berkshire class A shares Thursday fell $2,800 to $108,900, amid a market sell-off.

Being AAA "reflected well on the way (Buffett) ran the business," says Jeff Matthews of investment firm Ram Partners, and a Berkshire shareholder.

S&P is the last of the three major credit agencies to cut Berkshire's ratings. Moody's cut its rating one notch last April, and Fitch Ratings downgraded it by a notch last March.

Even so, the cut is notable to investors because it shows the:

-Erosion of the creditworthiness of U.S. companies. There were more than 60 U.S. non-financial companies with AAA ratings in the early 1980s, S&P says. Now, just four AAA industrial companies are left: Automatic Data Processing, ExxonMobil, Johnson & Johnson and Microsoft, S&P says. Separately, 18 financial companies are still considered AAA. "Clearly, it's something companies don't want to lose," says S&P's Diane Vazza of AAA ratings.

-Rising riskiness of Berkshire business structure. The Burlington deal represents a massive bet by the company and uses up a pile of the company's cash reserves, Matthews says. Berkshire has "taken all the chips from the pile and pushed them into the center of the table," he says.

-Awareness of financial risk. Berkshire's ratings still top most rivals', but the downgrade underscores the innate risk of the financial industry, says Meyer Shields of Stifel Nicolaus. Seeing Berkshire's fall shows how global competition is making a perfect rating harder to keep, says Marilyn Cohen of Envision Capital. "It's a sign of the times," she says.

B) Playing Defense

Consumer products giant Johnson & Johnson (NYSE:JNJ) continues to demonstrate why it may be one of the highest-quality companies in the world. J&J, the world's largest maker of healthcare products, reported a 9% uptick in sales in the 2009 fourth quarter. Net profit was 79 cents per share, down 20% due to one-time restructuring charges. Net income from operations would have been $1.02 absent such charges. The full year earnings number came in at $4.40 a share on sales of $62 billion, down 5% and 3% respectively.
The Bigger Picture
Johnson and Johnson may well be one of the most recession resistant companies in the world. Despite this, the company couldn't avoid a sales decline in 2009, even though a 3% drop would be the envy of most other businesses. Before the impact of the Great Recession, J&J had had a decades long streak of reporting both an increase in sales and earnings. And while the company's current size prevents it from nailing down the stunning growth figures it produced in its early years, J&J continues to have a bright long-term future. The company's products - things like Tylenol, Band-Aids and baby shampoo - have nearly unlimited growth potential in international markets

Good as It Gets
Like any company, J&J has its competitive pressures. Its pharmaceutical products have to contend with generic competition and in 2009, the company's medical devices division was down due to a drop in elective surgical procedures. But the company's long-term appeal is one found in only a handful of names like Coca-Cola (NYSE:KO) and Procter and Gamble (NYSE:PG). These businesses have products with continuous global appeal supported by brands that control markets. And today, a quality name like Johnson and Johnson trades for less than 14 times earnings and yields 3%. Compare this with iconic retailers Nordstrom (NYSE:JWN) and Tiffany's (NYSE:TIF), both wonderful brands, but with valuations of 22 and 33 times earnings and half the dividend yield.

Bottom Line
Despite the market's performance in 2009, the economy is still very fragile. But products like J&J's are often at the top of consumer lists, so this company stands a better chance than most of weathering this storm with its armor intact.

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What is Your Plan for 2009 ?

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