The cash reserves of Warren Buffett's Berkshire Hathaway have swelled to nearly $130 billion and there is pressure to make a jumbo-sized buy.
Warren Buffett’s Berkshire Hathaway is currently hoarding $128 billion in cash. The investing conglomerate has accumulated this amount over the years on the grounds that there are no attractive acquisitions to make as stocks have become too expensive.
This has come at a cost, as Berkshire Hathaway has now underperformed the S&P 500 for a decade. While its holdings have gone up 259% in the past decade, the large-cap index has posted a gain of 314%. In 2019, the S&P 500 appreciated by 18% while Berkshire Hathaway’s shares ticked up by 7.1%.
This underperformance, amidst ballooning cash reserves, means Buffett must go shopping. Earlier this year while delivering the investing conglomerate’s 2018 annual letter, Buffett promised to make an ‘elephant-sized acquisition’. As this has so far failed to materialize, 2020 is the year Buffett will come under enormous pressure to open his wallet.
Below are three stocks that could receive the ‘Warren Buffett seal of approval’ in 2020.
Earlier this year, Berkshire Hathaway made an offer to acquire technology distributor Tech Data for $5 billion. The Warren Buffett outfit was outbid by Apollo Global Management. Buffett’s rationale for his interest in Tech Data was its size, scale and fair value.
Additionally, with Tech Data being a middleman possessing hundreds of relationships with tech companies, it’s a ‘steady’ business cushioned from the negative forces that may plague one brand.
If Buffett is still interested in this kind of business, Ingram Micro fits the bill perfectly. For one, its parent company HNA Group tried to sell it in August. Regarding size and scale, Ingram Micro actually surpasses Tech Data.
The most recent publicly available report shows Ingram Micro’s global revenues were $42.6 billion versus Tech Data’s $37 billion. And per its website, Ingram Micro boasts of 35,000 employees, over 200,000 customers in 160 countries and represents over 1,700 vendors.
In the wake of the California wildfires, Pacific Gas and Electric Company (NYSE:PCG) is in bankruptcy due to liabilities resulting from the disaster. There is a chance that after the bankruptcy reorganization, some shareholder value will be retained. Traditionally, Buffett has shown a fondness for utilities. And while it’s hard to determine the stock’s current fair value, its price is dirt cheap right now, having fallen over 85% from its all-time high.
Interestingly, no less than California’s governor Gavin Newsom recently tried pitching the utility to Buffett.
One problem for PG&E though is that Buffett picks well-run companies, something that cannot be said of the energy utility.
With Buffett having a particular affinity for the logistics and transportation sector, FedEx (NYSE:FDX) has been suggested as a likely Berkshire Hathaway target. The president of Seabreze Partners Capital Management Doug Kass recently predicted that Buffett will acquire FedEx next year. Stated Kass in a Yahoo Finance interview:
I believe Warren Buffett will acquire Federal Express [in 2020]
A stake in FedEx would give Berkshire Hathaway an enhanced scale in the transportation and logistics sector. With the stock down over 40% from its 2018 all-time high, Buffett would be buying it at a bargain price.
On a price-to-earnings multiple basis, FedEx is heavily discounted relative to the wider transport sector.
Another possible target for Buffett includes Southwest Airlines. After Buffet made the ‘elephant-sized acquisition’ remarks, there was heavy speculation that he was planning to take over the airline.
It’s also possible for Buffett to increase his Berkshire Hathaway stake in Amazon. After expressing regrets over missing out on investing in Amazon when the stock was cheaper, Berkshire Hathaway finally bought a stake earlier this year.
This article was edited by Sam Bourgi.
Last modified: January 22, 2020 11:40 PM UTC