Magic happens on Wall Street when Warren Buffett decides to buy a stock. A few weeks ago the day Buffett made the buy on shares of Burlington Northern Santa Fe the stock popped $5.36 to $88.08 as investors celebrated the fact Buffet's company Berkshire Hathaway would own almost 40 million shares. But the pop was not over. As more small investors rushed into the market, the stock rose to $91.83.
A lot of traders on the floor of the New York Stock Exchange also keep an eye on Buffett. They have found that following a public announcement of Buffett's latest stock pick is a good short-term way to profit. So what happened? They bought in the high seventies, sold in the low nighties, and pocketed big money on the rush to buy the same stock Warren Buffett was buying. But the big money was made on call options - the right to buy a stock in the future at a set price. By paying maybe $400 an investor can look up 100 shares at say the market of $76. With a share price over $90 they can buy at $76 and sell at $90 without much capital. The worse that can happen is that the option is not excised and the investor loses $400. But not this time. Buffett make a lot of happy people on Wall Street.
One reason that might have caught Buffett's eye is that Burlington Northern stock is up this year 19.7%, and up 26.3% since the start of 2006.
When you look at the reasons Buffett invests in a new stock, the railroad fits most of his key requirements. He was looking at Burlington Northern Santa Fe because of:
·Large Cap, almost $30 billion
·Consistent earnings [5-yr growth annualized 22%]
·High return on equity [19% last year] and low debt
·High-quality management
·And last, it's a Buffett favorite, an Oligopoly - the company has an aversion to price competition because it deters new competitors.
By James Jorgensen - www.financialsavvy.com
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