A long-established cottage industry within the investment community is trying to anticipate Warren Buffett's next moves and to profit from them. Earlier this year, Buffett stated that he has "hope for an elephant-sized acquisition," per his annual letter to shareholders of Berkshire Hathaway Inc. (BRK.A). With over $112 billion in U.S. Treasury Bills and cash equivalents at year-end 2018, per its annual report, Berkshire has ample buying power.
Credit Suisse recently identified 141 potential targets for Buffett. After examining that list, Barron's applied their own analysis, reducing the field to 12 large companies, including these nine: Target Corp. (TGT), General Dynamics Corp. (GD), Anthem Inc. (ANTM), Amphenol Corp. (APH), Bristol-Myers Squibb Co. (BMY), BlackRock Inc. (BLK), Northrop Grumman Corp. (NOC), The TJX Companies Inc. (TJX), and The Sherwin-Williams Co. (SHW). All are easily digestible by Berkshire, as the table below indicates.
9 Possible Buffett Targets
(Market Capitalization as of April 5, 2019)
- Amphenol, $31 billion
- Anthem, $75 billion
- BlackRock, $71 billion
- Bristol-Myers Squibb, $76 billion
- General Dynamics, $49 billion
- Northrop Grumman, $47 billion
- Sherwin-Williams, $41 billion
- Target, $42 billion
- TJX, $66 billion
Sources: Barron's, Yahoo Finance
Significance for Investors
Buffett is well-known as a value investor, seeking out companies whose shares appear to be undervalued by the market currently, but which eventually should rise to fair value on the basis of strong fundamentals. An analytic framework based on seven key metrics has been developed by Wells Fargo in its attempt to replicate Buffett's decision criteria.
Credit Suisse, meanwhile, believes that cash flow return on investment (CFROI) is a key part of Buffett's screening process. They add that he looks for strong management teams, high returns on equity, little or no debt, stable profit margins, and businesses that are easy to understand, Barron's notes.
Berkshire has been lagging the market, so a big acquisition that can improve returns significantly would be welcome by its shareholders. The table below shows how far Berkshire stock has fallen behind the market recently.
Buffet Needs a Big Deal to Fire Up His Stock
(Comparative Gains: YTD 2019, 1 Year)
- Berkshire Hathaway Class A: +0.6%, +2.0%
- S&P 500 Index: +15.4%, +8.6%
Source: Yahoo Finance; pricing as of the April 5, 2019 close.
Despite passing the screens applied by Credit Suisse, Barron's believes that defense contractors General Dynamics and Northrop Grumman, as well as drugmaker Bristol-Myers Squibb, are unlikely targets for Berkshire. Defense contractors have their fortunes tied to Washington politics. Bristol-Myers is embroiled in controversy over its planned acquisition of biotech firm Celgene Corp. (CELG), as described by Investor's Business Daily. Meanwhile, Buffett has been hesitant about technology investments, due to his admitted lack of knowledge in the field. That may rule out Amphenol, which specializes in computer networking.
That leaves five easy-to-understand candidates: department store chain Target, discount apparel retailer TJX, paint and coatings maker Sherwin-Williams, investment management firm BlackRock, and health insurer Anthem. Barron's believes that TJX may be particularly attractive on the basis of "consistent returns and margins."
"I don't think people should be buying stocks because they're reading in the paper that we're buying something. But if they do, they may get cured of it at some point," Buffett said at Berkshire's 1994 annual meeting, as quoted by CNBC. He added, "So we will never comment on those stories, no matter how ridiculous they are." Accordingly, Berkshire has not responded to a request for comment by Barron's.