Warren Buffett wants an Elephant.
In Berkshire Hathaway Inc. (NYSE:BRK.B)‘s 2012 letter to shareholders, Buffett again stressed his desire to make a large acquisition. Given that Berkshire’s book value returns have trailed the S&P 500 during three of the last four years, it’s increasingly likely that a large acquisition will be made in 2013. At Berkshire’s size, a large acquisition is simply the easiest way to boost the bottom line.
So why not beat Buffett to the punch? Doing so would certainly boost your bottom line, as a premium would be paid for your shares.
Here are three undervalued “Elephants” that would should be bought by Berkshire, and by you.
Picking “Buffett” stocks is really not a guessing game. Berkshire has made public what they look for in acquisition targets, for years. The first three things Berkshire looks for are large capitalization, consistent earnings power, and good returns on equity. Buffett’s telling us, and potential acquire-es, exactly what he looks for.
You’d be hard pressed to find any company that fits those criteria as well as National-Oilwell Varco, Inc. (NYSE:NOV).
The company provides equipment for the oil and gas sector and has been on a stellar run of superb performance, and market share gains.
National Oilwell Varco has grown earnings 9% over the past year, while growing revenue 15%. Even better, the company showed outstanding performance in 2012 with that high return on equity Buffett likes (31%), and a whopping 25% growth in earnings.
Want more good news? Well, how about the fact that I already know Buffett likes National-Oilwell Varco, Inc. (NYSE:NOV). I can say this with reasonable certainty because Berkshire already owns shares–and they’ve been buying more recently!
Why it’s a good buy now:
National-Oilwell Varco, Inc. (NYSE:NOV) is currently trading well below its 52-week high. The price is depressed, with a P/E of just 11, due largely to margin concerns. But the company is betting that those near-term pressures will lead to a long-term monopoly.
The company is taking on lower margin business lines purposefully to gain even more market share by offering a “one stop shop.” With a slew of acquisitions, the company is consolidating the industry they serve and this should lead to a stronger moat and fatter margins in the long run.
As many fools have said–NOV stands for: “No Other Vendor.” I really like that the company isn’t resting on its 60% market share, they know what they want to be (a conglomerate) and they’re staying aggressive. If you agree with this strategy, the stock is a compelling buy at these levels.
Toll Brothers Inc (NYSE:TOL)
One of the many prevailing themes in this years “letter” was that Buffett is still incredibly bullish on the U.S. economy. And we already know, with his holding in USG and Wells Fargo, that he’s optimistic about housing. So why wouldn’t he take a look at a proven, best of breed leader like Toll Brothers?
This company has a phenomenal brand identity in designing, building and selling luxury homes. With a strong return on equity of 17.25% and a market cap under 6 billion, Toll Brothers Inc (NYSE:TOL) is profitable enough to boost Berkshire’s bottom line while still leaving cash on the books.
Why it’s a good buy now
Housing has been on and absolute tear and Toll Brothers Inc (NYSE:TOL) is trading near a 52 week high. But with a P/E around 11, it’s still a fantastic value here. One thing we can all learn from Buffett is to mimic his preference for companies that can charge more for their products, without losing customers. That’s luxury homes in a nutshell, and Toll Brothers Inc (NYSE:TOL) is the biggest fish in that pond. Considering its phenomenal performance in 2012 and the fact that its growth story (PEG of 1.15) has plenty of legs to it–there’s still value there.
AFLAC Incorporated (NYSE:AFL)
Nothing would be more “old-school Berkshire” than buying an unloved, undervalued insurance stock. That’s exactly what Aflac is and while it serves a vastly different function than Berkshire’s Geico, it boast an even greater moat. AFLAC Incorporated (NYSE:AFL)is synonymous with supplemental health, life, and injury insurance.
Why it’s a good buy now:
I’ll never understand why the market, pundits, and analysts always have this one in there cross-hairs–but they just do. The stock is perpetually undervalued and the company would be better off bought. This way it could escape the market and just return gobs of cash to a would be acquire-rs bottom line.
With a P/E of just 8 and a return on equity around 20%, now’s as good a time as any to buy AFLAC Incorporated (NYSE:AFL). The company has shown tremendous consistency by growing earnings, revenue, and its dividend yield over 10% each of the past five years. It’s worth noting, that the company did this and stayed completely profitable all the way through the financial “meltdown” of 2008 and the great recession.
With a solid track record and a price-to-earnings growth ratio of just 1.21%, the stock deserves to be bought–by Buffett and by you.
Number four, number five, and the “ah-ha” moment
All of these stocks operate in industries (energy, housing, insurance) that are “needs” not “preferences. And all of our firms have long-tenured management teams, with AFLAC Incorporated (NYSE:AFL) and Toll’s management team dating back a half century a piece. In short, they fit No. 4 and 5 of Berkshire’s acquisition criteria; they have simple business models and long-tenured management teams.
When Warren Buffett speaks, the world listens. There’s a reason for that.
The “ah-ha” moment for us is that if these businesses meet Buffet’s criteria, perhaps they should meet ours. We can’t know which “Elephant” Buffett will bag, but these stocks have proven track records and are worth buying on their own merits.
And if Warren wants to join us, well, I certainly won’t stand in his way!
The article Buy These 3 Undervalued “Elephant” Stocks…Before Buffett Does originally appeared on Fool.com and is written by Adem Tahiri.
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