3 Companies Buffett Might Buy

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Berkshire Hathaway’s (NYSE: BRK-B) annual letter to shareholders was released Friday. In the letter, Buffett states that the firm continues to look for large acquisitions. Even with its recent purchase of Heinz, Berkshire still has some $30 billion left in cash. What companies might Buffett acquire?

Buffett likes boring companies
Buffett certainly doesn't like flashy, high-flying companies. He’s largely shunned the tech industry in general. Instead, Buffett favors consumer staples, insurance companies and utilities. His ownership of Geico and Fruit of the Loom, along with his large Coca-Cola stake, are characteristic of Buffett’s investment strategy.

Buffett is famously a student of Ben Graham -- the father of value investing. Under that school of thought, investors buy good companies trading at low valuations. Low price-to-earnings ratios, for example, and low price-to-book values are favored metrics. (PE ratios compare a company’s prior earnings to its share price, while price-to-book ratios compare assets to the stock price.)

Along with that, Buffett likes companies with wide moats. Coke’s secret recipe, for example, makes its business not easily replicated.

So that said, all potential Buffett targets should be trading at reasonable (or cheap) valuations and be involved in stable businesses that aren’t easily replicated. And since Buffett is only working with about $30 billion, giants like General Electric are out of the question.

Buffett has long been linked to Archer Daniels Midland
Buffett owns shares in Archer Daniels Midland (NYSE: ADM), the food processing company, but he’s long been linked to a potential outright takeover. In July 2011, Buffett told Bloomberg that ADM was “the kind of company we look at.”

As of Friday, ADM currently trades a PE ratio of about 15 -- less than the 17.27 that the broader S&P 500 currently trades at. ADM’s price-to-book ratio stands at 1.10; compare that to, say, Netflix’s price-to-book ratio of roughly 14.

ADM specializes in food processing -- a simple business that doesn’t seem to be going away anytime soon (people need to eat after all), and it’s one of the largest businesses of its kind. With a market cap near $21 billion, Buffett could afford it, even if he had to pay a large premium.

The only thing that may preclude Buffett from purchasing it is how explicit he’s been in suggesting that he would be interested in the company.

Maybe Buffett could go after a defense name
In the same Bloomberg interview that Buffett mentioned ADM, he also said he liked General Dynamics (NYSE: GD).

General Dynamics fits most of the requirements: its market cap is about $24 billion, its price-to-book is a relatively modest 2.10, and it operates in an industry -- defense -- that isn’t likely to vanish overnight.

Yet, there are some things that might keep Buffett away. For example, the company currently has no PE ratio. In January, GD reported a $2 billion loss on a write-down of the company’s IT department. As the U.S. government moves to rein in its spending, big defense contractors like GD could be pinched.

Of course, shares of defense names, including GD, have fallen to reflect perceived budget cuts. Trading near $68, shares are solidly off their 52-week high of $74.54. If Buffett acts now, he might be able to snag a bargain.

Would Buffett pair his Heinz buy with a McCormick purchase?
Like Heinz, McCormick (NYSE: MKC) is a well-known, staple food brand. In fact, shares of McCormick have rallied in virtually every session since Buffett bought Heinz just a couple weeks ago.

Buffett certainly could afford McCormick -- its market cap is only $9 billion. Further, it operates a type of business Buffett has an affinity for.

The problem lies in the fact that McCormick isn’t really a cheap stock. Its PE ratio of 22.50 means it’s relatively more expensive than the S&P 500, although its price-to-book ratio of 5.30 is nearly identical to Coke’s 5.28.

A high PE ratio isn’t necessarily a deal breaker for Buffett; after all, he owns about $400 million worth of Costco shares (PE over 25). But, if he’s interested in McCormick, that would likely be a major detrimental factor.

Should investors try to front-run Buffett?
Buying a stock simply on the hopes that the company will be acquired might not be the best investment strategy (Jim Cramer strongly recommends investors avoid it).

That said, if investors believe that Buffett would be interested in the company, perhaps it’s a worthy investment in general. Buffett has amassed his fortune by buying up cheap, boring companies. Archer Daniels Midland, General Dynamics and McCormick might not be the flashiest investments, but over the long haul, they could be the type of stocks that produce Buffett-like returns.


joekurtz has no position in any stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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