lundi 5 novembre 2018

Buying something with 100 billion dollars

When you have 100 billion dollars on hand and you're Google, you can't buy random stuff because you operate in a specific sector.and your purchase will be judged severly if it's too creative. But when you're Berkshire, you don't have to respect any kind of logic because you already own candy shops and railroads.

So, with about 100 billion dollars, what could Berkshire Hathaway buy? (100 billion dollars = about 20% of the value of the holding). 
The last big acquisition of Berkshire was Precision Castparts for 37B dollars, on august 10, 2015 (2 years and a half ago). What were the characteristics of that stock? 
  1. A company with a huge moat (parts for aeronautics)
  2. A stock with a fair PE on an historical basis (about 18 times next year's earnings which may look expensive, but for Precision Castparts it wasn't that expensive even if Buffett said it was expensive)
  3. A highly predictable stock
  4. A stock with growth prospects
If Buffett wants something that will have some impact on Berkshire, he probably won't buy a small or medium cap stock. So, even if Francois Rochon has said in the past that Carmax (KMX) would be the kind of stock that Buffett would buy, with a market cap of about 12B$, it wouldn't make a big difference on Berkshire.
So, let's speculate…
I believe Buffett will buy a big company (50B$ and more) that experiences some slowdown and is thus avalaible at a cheap price. Buffett rarely buys expensive stuff. So, here's a list of cheap medium or large caps with highly predictable earnings. I suggest a few not-so-large-caps because I think they're very cheap at the moment and they fit with Buffett's style. Carmax is among them.
Booking Holdings (BKNG): Forward PE = 19       predictability = 80%
Marriott (MAR): Forward PE = 19                         predictability = 60% (a little low for Buffett)
Cognizant (CTSH): Forward PE = 14                      predictability = 100%
NVR Homes (NVR): Forward PE =12                    predictability = 80%
Mohawk (MHK): Forward PE =11                         predictability = 80%
O'Reilly (ORLY): Forward PE = 18                          predictability = 100%
Carmax (KMX): Forward PE = 14                          predictability = 95%
I know that Buffett very rarely buys outside of the US, but here's two canadian stocks which I believe would fit with Buffett style and that are not that expensive.
Couche-Tard (ATD-B): Forward PE =  15      predictability = 85%
CCL Industries (CCL-B): Forward PE = 17     predictability = (not on Value Line but good anyways)

Buffett won't gamble with something that's not 80-100% predictable (according to Value Line). I'm sure that all the stocks above are liked by Buffett.

Feel free to add some ideas.

4 commentaires:

  1. He could take a bigger position in APPLE.

  2. When he says he cant find anything to buy he is lying. He is simply timing the market by keeping the cash for the next significant downturn when valuations compress before pulling the trigger.

  3. Actually Buffet's Berkshire Hathaway is so impossibly large now that he has little in common with the small do-it-yourself investor at home...The following quote is either from Buffet himself or maybe his partner, Charlie Munger...

    ". “Size will hurt returns. We can only buy big positions, and the only time we can get big positions is during a horrible period of decline or stasis. That really doesn’t happen very often.” There are times when Mr. Market turns fearful and huge amounts of capital can be put to work even by Berkshire as was the case in 2008. To be able to take advantage of this requires that the investor (1) be patient and (2) be aggressive when it is time. Jumping in when things are falling apart takes courage. Not jumping is during a period of investing frenzy takes character. Bill Ruane believes: “Staying small in terms of the size of fund is simply good business. There aren’t that many great companies.” The bigger the fund the harder it is to outperform. Bill Ruane famously closed his fund to new investors to be “fair” to his clients.

    This description of his investment philosophy pretty well fits with Bruce Flatt's own approach to investing. That's why I'm heavily investing in the Brookfield family of companies.

  4. He could buy back more shares. The 928 millions he bought back this quarter represents less than .25% of the market cap, so it's not that significant. However, changing his strategy to buying back more shares in the future at a slightly more expensive price could be a way to return more money to shareholders? He often said that he will buy back his shares when the stock price goes down to 1.2X the book value. Why not 1.3X the book value?