Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B) recently announced record second quarter earnings. While the company hasn’t yet released its balance sheet data experts familiar with the company estimate that he has $55 billion to play with. And the number could be bigger: Berkshire has excellent credit given that it has very little debt outstanding and substantial cash-flow from dividends and from the various businesses Buffett has bought over the years.
It wouldn’t be surprising to see Buffett go out and buy a large company, or “go elephant hunting” as he likes to call it. But what kinds of companies will Buffett be looking at?
Buffett is interested in companies with the following attributes. First, he likes companies that are easy to understand. So he like companies that sell things like candy and clothing. Second, he likes companies that don’t face a lot of competition—he like wide economic moats. This means he likes companies that either have brand power [e.g. Nike (NYSE:NKE) or Coca Cola (NYSE:KO)] and de facto monopolies that are virtually impossible to replicate (e.g. railroads). Third, we know he doesn’t like “hot” stocks or controversial stocks of bad companies that have a slim chance of improving their operations—he likes quality stocks of quality companies. Finally, he likes companies that have relatively high predictability. He likes to say that he is relatively certain that Coca Cola will be selling much more of its products in 20 years from now. This means that he doesn’t like technology companies, that are constantly adapting and updating their products.
With this in mind, I think Buffett can have the following companies on his radar, and he can afford them all.
1. Hershey (NYSE:HSY)
Hershey has a valuation of about $20 billion. The company is a global leader in the candy space, and it is growing its business at a reasonable pace. It satisfies the above criteria. First, it is easy to understand: it makes and sells candy. Second, it has a lot of brand power (even if we don’t eat Hershey products we are all familiar with them). Third, the company isn’t “hot.” It flies under the radar, and in fact the stock has been extremely weak since it peaked in February at $109/share (it trades at $90/share now). Finally, Hershey has a predictable business—we can be pretty sure that people will be eating candy in the future, and given Hershey’s leadership role in the space Hershey is positioned to grow in this time frame. With this in mind Hershey could be on Buffett’s radar.
2. Mosaic (NYSE:MOS)
Mosaic has a valuation of $18 billion. It is a leader in the fertilizer space with an emphasis on phosphates—a kind of fertilizer that is essential to growing crops and that is predominantly found in West Africa. Fertilizer is an essential commodity, and Mosaic is a company that fits Buffett’s criteria. First it is easy to understand: the company mines for phosphate and potash and sells them to farmers. Second, it has an economic moat—Mosaic owns some of the biggest and most profitable fertilizer mines in the world that have extremely long lives, and it has a well-established distribution network in the United States and a growing one in Latin America. Third, the stock has been down over the past few years as fertilizer prices have fallen—but this doesn’t detract from the product’s importance to the global economy. Finally, it is predictable: Mosaic will likely be producing fertilizer twenty years from now, and much of this will be at currently producing mines.
3. McCormick & Company (NYSE:MKC)
McCormick has a $9 billion valuation. It is a leading seller of spices and it fits perfectly in Buffett’s portfolio even if it is a bit small relative to Berkshire’s $320 billion valuation. First, it is an easy business to understand: the company produces and sells something that can be found in virtually every household. Second, it has brand recognition: McCormick may not have the immediate brand recognition of Apple (NASDAQ:AAPL) or Coca Cola but it is by far the leader in its industry. Third, it is a company that flies under the radar and shares have been weak as of late. Finally it is hard to imagine that people won’t be using spices for many years to come, and it is also hard to believe that McCormick won’t be supplying a great deal of these, making it an excellent target for Buffett.
Disclosure: Ben Kramer-Miller is long Mosaic.