Profit From 5 Trades Warren Buffett Made

BALTIMORE (Stockpickr) -- What's Warren Buffett buying? As usual, when Berkshire Hathaway (BRK.B) released its 13F filing to the public on Friday, people went nuts.

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How nuts? Berkshire's biggest buy for the quarter picked up another $8 billion in valuation as new buyers piled into shares. But Wall Street got a lot of the details wrong about the Oracle of Omaha's stock spending spree. That's why we're taking a closer look today.

It's not understating things to say that it was another quiet quarter at Berkshire. The $92 billion portfolio only increased stakes in six stocks in the third quarter, and none of those positions were new. Instead, Todd Combs and Ted Weschler, Buffett's team of two portfolio managers, stuck with increasing stakes in their favorite names in 2013.

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That's fine as far as Buffett is concerned: Both managers beat the S&P 500 by double digits last year.

Even though the buying has been cautious, it tells us a whole lot more about the stocks that these guys like than if they'd been buying with both hands. And buys aren't the only telling trades going on at Berkshire. The stocks that Berkshire unloaded are pretty informative too.

So, want to profit from the trades that Buffett made? Today we're taking a closer look at five conviction trades from Berkshire Hathaway's portfolio.

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That word -- conviction -- is an important distinction for the folks poring over Berkshire's latest 13F filings with the SEC.

Exxon Mobil

Berkshire's purchase of shares of Exxon Mobil (XOM) has been generating a lot of buzz in the last few days -- but one detail that most are getting wrong is the idea that this is a new position. It's not. Berkshire actually picked up most of its 40 million share stake last quarter, even though the SEC allowed Buffett and company to keep the move confidential as they accumulated shares. "Only" 8.85 million shares were added to the position.

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That's not the first time Buffett has secretly bought shares of Exxon -- Berkshire did the same thing back in 2009. But what's interesting is that you didn't need to see the 13F filing to know what was going on. Warren Buffett has been singing XOM's praises in Berkshire shareholder letters since last year.

Exxon Mobil is an integrated oil and gas supermajor with more than 18.2 billion barrels of oil equivalent in its proven reserves. That's enough scale to make Exxon the world's biggest refiner and one of the biggest makers of processed commodity products. In recent years, Exxon has been focused on reducing production costs and shifting its product mix more towards nat gas, which has helped to solidify the fortress-like double-digit margins that XOM currently sports.

It's not surprising that Buffett likes Exxon -- the firm has a strong history of returning value to shareholders, thanks to a 2.6% dividend yield and a share buyback program. With a low earnings multiple priced into shares and around 5% of the firm's market capitalization covered by cash and investments, XOM is looking cheap too. A technical turnaround in shares since early October rounds out the picture in Exxon; you could do a lot worse than to follow Berkshire Hathaway into this stock.

Suncor Energy

Exxon wasn't the only energy name that Berkshire picked up last quarter -- Suncor Energy (SU) was another. Buffett and company bought 240,500 shares of the Canadian oil firm, building its stake in the stock to $644 million.

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Suncor is the biggest oil and gas name in Canada, with 550,000 barrels of oil equivalent coming out of the ground every day. The firm is a major oil sands operator, exposure that the firm was able to acquire relatively cheaply and is now leveraging for bigger margins than most of its peers. Investments in new extraction technology have helped to bust through plateaus in production at SU's oil projects, squeezing more cash from older assets.

Like Exxon, Suncor is an integrated energy firm. That means that the company is involved with every step of the process, from pulling commodities out of the ground to transporting, refining, and retailing fuel at Petro-Canada gas station locations. While operations downstream are dilutive to margins (holding SU's net profit margins sub-10%), they give the firm a heftier top-line than a standalone E&P stock would have. Despite the upside, Suncor isn't a very exciting energy name; investors are better off in Exxon.

ConocoPhillips

Based on the two big oil buys, it's easy to think that Bershire Hathaway made a big bet on the energy sector last quarter -- but that ignores the huge sale of ConocoPhillips (COP) shares, which flushed more than $519 million worth of the Houston-based E&P from Berkshire's portfolio. The trade nearly halved Buffett's stake in ConocoPhillips, almost offsetting the Exxon and Suncor trades entirely.

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There's a big difference between ConocoPhillips and the energy stocks that Berkshire actually bought: COP spun off its downstream operations into Phillips 66 (PSX) in May 2012. The result is one of the biggest pure-play oil and gas producers with 8.6 billion barrels of proven reserves. But the fact of the matter is that a lack of refineries and gas stations actually makes COP more attractive, not less. Without the paper thin margins those businesses provide, ConocoPhillips converted twice as many sales dollars into profit as Exxon did last quarter.

Around half of ConocoPhillips' reserves come from natural gas. That's an attractive mix, especially given how the firm's supermajor peers have been falling all over themselves to boost exposure to nat gas by acquiring big producers in recent years. With oil prices holding onto the high end of their historic range, nat gas prices are starting to see some buoyancy as consumers substitute one fuel for the other.

With Buffett selling COP right now, I'd be buying.

DaVita HealthCare Partners

Enough about energy. DaVita HealthCare Partners (DVA) is another name that should sound familiar to Buffett disciples. And the Oracle of Omaha is buying more in 2013. Berkshire Hathaway added 1.5 million shares to its portfolio in the latest quarter, boosting its total stake to $1.79 billion.

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DaVita operates more than 1,850 dialysis clinics and in-patient hospital dialysis units across the U.S., serving patients who suffer from chronic kidney failure. The long-term nature of dialysis treatment makes DVA's business pretty predictable, since kidney transplants are scare. DaVita has been cautious about its relationship with Buffett's firm -- the two parties agreed to a deal in May that limits Berkshire Hathaway's ownership of DVA to 25%. The latest trade brings the DVA stake to 14.8%.

A $4.4 billion merger with HealthCare Partners changed DVA's business dramatically in the past year, putting medical practices, hospitals, and pharmacy services under DVA's umbrella for a 25% contribution to corporate revenues. But none of that changes the fact that DVA trades for a premium right now. While demographic tailwinds should keep a steady stream of patients at DVA's doors, much of that upside is already priced into shares.

GlaxoSmithKline

Last up on Berkshire's conviction trade list is GlaxoSmithKline (GSK), a $130 billion pharmaceutical name that Buffett's stock pickers unloaded en masse in the last quarter. With the $1.13 million share selloff in Berkshire's portfolio, the firm owns a "meager" $17 million stake in the firm. GSK isn't the only big pharma name that got sold off in the third quarter; the firm also dumped nearly 160,000 shares of Sanofi (SNY).

GlaxoSmithKline owns a broad portfolio of drugs and vaccines that span nearly every category. Even though crown jewel Advair lost patent protection in 2010, generic competition has been far less than the bear case proposed by Wall Street. Going forward, Glaxo's investment case looks a lot like most of its peers: big R&D investments into rare diseases hold orphan drug potential for GSK, at the same time that longer-running efforts on more mainstream drugs get closer to market.

Glaxo is currently in the middle of a major cost-cutting initiative that should take some of the pressure off of the firm's pipeline until more new offerings hit the top of the income statement. But that hasn't stopped investors from pricing in black clouds over a 4.58% dividend yield at current price levels. Buffett and company are all but out of this stock at this point, but with decent fundamentals and rapidly improving technicals, GSK actually looks much better positioned than DaVita does right now.

To see the rest of Berkshire Hathaway's plays -- including a complete list of which stocks the firm added or sold off -- check out the Warren Buffett Portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to

TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji