Warren Buffett's eagerly awaited letter to Berkshire Hathaway (BRK.A) (BRK.B) shareholders was posted over the weekend and the Oracle of Omaha referenced wanting to make an "elephant-sized acquisition" with some of its cash pile.
I am not sure that Buffett would listen to my advice, but that got me thinking of five acquisition candidates for Berkshire Hathaway. If you read my Real Money columns, however, you would realize I haven't been spending much time lately listening to his advice, either.
I deal with facts, and facts only. Reputational investing holds zero allure to me. I mentioned the numbers in my Friday Real Money column, but Berkshire's B shares' total return has lagged its Morningstar benchmarks for the trailing 1-month, 1-year, 3-year and 10-year periods.
Like most investors I want to beat the market, but Berkshire's lack of a dividend means that the market always has a head start. That alone, obviously, doesn't explain blow-ups like the meltdown in shares of key Berkshire holding Kraft Heinz (KHC) on Friday.
Clearly Buffett is holding too much cash -- $112 billion as of Dec. 31 -- and he has been hinting that he would like to reduce that pile, noting to CNBC this morning that Berkshire was "very close" to making a major acquisition in the fourth quarter.
Cash is indeed a lazy asset, but the genesis of Berkshire's underperformance hasn't been the lack of deployment of resources into corporate assets, rather it has been choosing the wrong investments. I have stated this in many Real Money columns, but the core weaknesses in Berkshire's portfolio are twofold, and too glaring to miss: lack of innovation and an overreliance on the U.S. market.
Buffett's shareholder letter was yet another paean to the virtues of America and seemed to lack any deep understanding of disruptive technologies and their potential to generate massive returns to investors as Amazon (AMZN) , Netflix (NFLX) , and Uber (for private investors) have done without any Berkshire involvement. So, quickly, here are five ideas for the Oracle from the Guru:
General Motors (GM)
Yes, there is innovation coming from Detroit. GM's Cruise division is a key player (along with Alphabet's (GOOGL) Waymo and Uber) in the race to develop autonomous vehicles. That division has already garnered outside investments from Honda Motor (HMC) and SoftBank (SFTBY) , and, crucially, is focusing on Mobility-as-a-Service (MaaS.). The real appeal for Berkshire, though, would lie in buying the entire entity owing to its low valuation.
Real Money readers will know that I spent my entire sell-side career as an analyst following autos, and of course I realize it is a cyclical industry. But GM's strong margins (in excess of 10% in its core North American operations in the fourth quarter) drove $4.4 billion in free cash flow generation in 2018.
GM is trading at 6.2x the Street's consensus 2019 EPS forecast of $6.48, and surely the student of Graham and Dodd could see that that valuation is below intrinsic value, especially with the attractiveness of Cruise.
Cheniere Energy (LNG)
With a market cap of $16.7 billion, Cheniere is just at the threshold of materiality for Berkshire. Buying Cheniere, though, would give Berkshire entree into the market for liquified natural gas, a commodity which, as Royal Dutch Shell (RDS.A) noted this morning, is expected to generate 11% growth in global trade this year.
LNG is produced in the U.S. and exported to Asia, which is the opposite of Berkshire key holding Apple's (AAPL) production process. So, Cheniere would be a natural hedge for Berkshire via clean-burning, abundant natural gas.
Investments as Opposed to Full Buyouts
What about stakes in companies as opposed to full buyouts? That has always been a key Berkshire strategy and my final three recommendations would be for investments, not takeovers.
Kraft Heinz and Coca-Cola (KO) have been brutal underperformers for Buffett. The message here is to stop trying to cash in on decades-old consumer behaviors and avoid making predictions on future behaviors.
The knee-jerk reaction would be to buy something healthy, but that in my opinion would be a mistake, as well. Whole Foods has not exactly been a homerun for Amazon, but Bezos built Amazon by serving the consumer not making products for the consumer.
According to SEC filings Berkshire sold its last shares in Walmart in November. That was a big mistake. Walmart touches the U.S. consumer in so many ways and strong fourth-quarter earnings showed its digital strategy is gaining traction.
Buffett famously doesn't know how to use a computer, but I would be happy to teach him how to use Tencent's WeChat app, which I use every day. WeChat and Tencent's other chat app, QQ, have more than 1.2 billion users combined. Plus, Tencent's equity stakes in Tencent Music Entertainment (TME) and electric car maker Nio, Inc. (NIO) offer strong footholds in disruptive technologies.
Like Amazon, Ocado's core competency is in warehouse logistics, not packaging foods or sodas. It is a U.K.-based grocery retailer, to be sure, but its shares haven't risen 67% in the past year because customers there are buying more baps and toffee.
Given its logistics prowess and forays into AI and automation, Ocado is the next Amazon, in my opinion. As Buffett frequently laments missing out on Jeff Bezos' creation the first time, he should take advantage of a second chance.