It really wasn’t easy to figure out what Warren Buffett was going to invest in when he first took over Berkshire Hathaway all those years ago. He was focused on a lot of companies that really weren’t all that interesting, and most people haven’t even heard of them because they just weren’t paying attention to these businesses. Things are very different now, since he has billions of dollars of cash to spend and a whole lot of public scrutiny to deal with. This leaves Warren Buffett with a lot fewer choices to make when it comes to his investments.
It’s not possible for Warren Buffett to spend $10 million on an investment, and make the kind of return that his company and shareholders are expecting. If he is going to continuously wow the world with his prowess for investing, than Warren Buffett has to keep firing his proverbial elephant gun. The ammunition for this gun is billions of dollars, and his targets are companies that everybody knows very well. Warren Buffett mentioned in 2010 that he was ready to make a major purchase. But where will he go to spend his money?
It’s Hunting Time!
Berkshire Hathaway has one of the greatest problems you could ever want. They have so much money that they don’t have enough places to put it all. When Warren Buffett and the other members of Berkshire Hathaway go fishing, they aren’t looking for trout so to speak, they are trying to pull in a killer whale. He isn’t completely interested in only limiting himself to mega caps and large caps. He would be ecstatic if he could bring forth returns of 50% or more in the smaller capital pool of businesses. He also mentioned that he wouldn’t mind going around and buying up lots of single-family homes right now. But when you have more than $40 billion worth of cash on your company’s balance sheet, you would have to buy way too many houses in order to spend all that money.
The last major purchase that Warren Buffett made was in the amount of $34 billion when he bought Burlington Northern Santa Fe railroad. Berkshire Hathaway and its shareholders became the owner of the biggest rail transporter of grain and coal. This was an excellent deal which has paid them off tremendously, and you shouldn’t be surprised since all of Warren Buffett’s moves seem to always make a lot of money. If we use $34 billion as our baseline, we can try and figure out what Warren Buffett might buy next.
If you look at publicly traded companies worth $25 billion to $50 billion, you have more than 500 options to choose from. But there really aren’t a lot that meet Buffett’s normal criteria of cash generating, wide moat businesses in which Warren regularly would buy in the past.
General Mills is certainly one pick that you would have to consider. This type of pick is right up Warren Buffett’s alley since it has strong pricing power and it also has a wide moat. Buffett has talked extensively about the great pricing power that breakfast cereals present. Plus, General Mills has a tremendous portfolio of brand names and it continuously prints money year after year.
With a $25 billion market cap, General Mills might be one of the smaller companies that Buffett could personally consider purchasing. They do have a forward P/E of around 13 times earnings, and they are a lot cheaper than Buffett’s other favorite food business which is Kraft.
Kraft was one of the top companies in Warren Buffett’s portfolio until he pared back on his shares very recently. Kraft has an upcoming spinoff that is about to take place, so we don’t know for certain if Berkshire Hathaway will hold onto their 59 million shares. Kraft currently trades around 15 times its earnings.
Is Shipping in Berkshire Hathaway’s Future?
FedEx is definitely another wide moat company that could very well end up in Warren Buffett’s crosshairs. The thing about FedEx is that it actually possesses just about all of the qualities that Warren Buffett looks for in his investments. They are an industry leader in the shipping business, which is very difficult to come by, so there aren’t going to be many new people coming in and dethroning them because it will cost so much money.
This company is going to benefit when the economy turns around, and that hasn’t happened just yet so FedEx has a few more years before business starts booming once again. The EV/EBITDA of FedEx is less than five, and their return on equity is actually more than 13.5%. The company is priced very fairly, and it’s even somewhat on the cheaper side. But they also have a good return which could benefit Berkshire Hathaway. Berkshire even has the ability to add in some capital injections which will provide them the chance to really outdo their competitor UPS.
What about a Private Purchase?
There’s always the possibility that Warren Buffett and Berkshire Hathaway will look into buying a privately owned company as opposed to one of the public companies that we mentioned earlier. There are a lot more private businesses available for purchase, and one company that immediately comes to mind is the Mars Corporation. Warren Buffett has dealt with this company already in the past, when he acquired Wrigley, so it makes sense that this business would be a great fit for the Berkshire Hathaway company portfolio.
There’s no question that Berkshire Hathaway has a major acquisition set in its sights. So pay close attention to any statements that the Oracle of Omaha makes during the next few months. If you come across a company that you believe Warren Buffett might purchase, then by all means go ahead and pick up some shares. Even if he doesn’t buy the company, you own quality shares in a cash generating business that is very conservative. It’s going to help your portfolio no matter what way you look at it.