Buffett's Next Elephant: 6 Stocks He Could Buy Next

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Includes: BRK.A, BRK.B, CEG, EPD, ETE, EXC, FAF, FAST, FNF, GWW, KMI, KMP, PAYX
by: Investment Underground

Now that the Lubrizol (LZ) purchase has cleared, it's time to examine the investing wilderness to find Warren Buffett's next elephant for Berkshire (NYSE:BRK.B) (NYSE:BRK.A). The proverbial elephant gun is reloaded. With a deal value of $9.7B, there is plenty of ammo for not just one, but several deals of that size. Here are 6 stocks we think the "Oracle of Omaha" could buy next:

Fidelity National Financial (NYSE:FNF): Fidelity National provides title and specialty title insurance, claims management and information services throughout the United States. It currently holds the largest market share in the title insurance market, at 38%. It currently yields 3.49%. Shares are worth $22 apiece using a discounted cash-flow analysis. Title insurance premium growth will likely remain strong due to bursts of refinancing and foreclosure sales. Margins will benefit from Fidelity's further use of cost-cutting technology, and should remain around 9-10% as a result. For more details on FNF, see our full article here.

Berkshire loves insurance, and Fidelity is an insurer. We also recommend taking a look at the other dominant franchise in the title insurance business, First American (NYSE:FAF). FAF is a safe dividend payer.

Fastenal (NASDAQ:FAST) shares are up 41.8% over the last five years. It typically pays dividends twice per year and more recently, it also pays a special dividend. The company paid the most dividends per share in 2010 with $1.24. This was a yield of 2% in 2010. Shares trade at a P/E of 32.29, and FAST has a market cap of over $9.5 billion.

In 2010, company revenues were $2.26 billion with an EBT margin of 18.98% and ROIC of 21.46%. Looking at one competitor (that Buffett could potentiall buy), over the last 12 months, WW Grainger (NYSE:GWW) made $6.98 billion in revenues with an EBT margin of 11.55% and ROIC of 17.59%. However, Fastenal has no debt on its balance sheet, and WW Grainger has a D/E of 0.21. Fastenal sells construction and industrial supplies in both wholesale and retail forms. Its products are separated into two categories: threaded fasteners and miscellaneous supplies. The company has 2,490 stores in the U.S., Mexico, Singapore, China, The Netherlands, United Kingdom, Hungary and Malaysia.

Fastenal remains one company with blowout earnings potential.

Enterprise Products (NYSE:EPD) The company is the largest publicly traded partnership and a leading North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquidss, crude oil, refined products and petrochemicals. In 2010, the company increased revenues by 32.25% to $33.73 billion, but the EBT margin remains razor thin at 4.18%. However, GAAP EPS fell by 33.53% to $1.15. In 2011, analysts expect to see between $1.60 and $2.16, or an increase between 34.4% and 81.5% from $1.19, which was the non-GAAP EPS in 2010.

Revenues are expected to be between $34.4 billion and $44.7 billion, or an increase between 1.9% and 32.5%. Before the sales multiple can rise, the company needs to show EPS growth in the 20's, which analysts certainly expect, but let's wait and see what the next two quarters hold. The company also has a reasonable debt to equity ratio for a pipeline company, at 1.17.

We think prospects for growth with Entergy Transfer Equity (NYSE:ETE) are more substantial.

Paychex (NASDAQ:PAYX): Paychex provides payroll, human resources, and benefits outsourcing solutions. Its clients are small and medium-sized businesses in the U.S. and Germany. The company was recently named to Training Magazine's Top 125 list of outstanding international training organizations for the tenth straight year, ranking 26th.

PAYX has a market cap of $11B, and trades at a 21.44 P/E ratio. Its operating margin of 36.7% and ROE of 34.72% are both in the top 10% of the business services industry, and the firm has no long-term debt. Finally, the stock pays a solid (4.10%) dividend yield.

We think Paychex is underappreciated by the investment community. This steady stalwart should provide solid returns for investors due to its durable competitive advantages in a relatively sleepy industry.

Exelon Corp. (NYSE:EXC): Exelon is a utilities holding company that provides electricity and heating through renewable and non-renewable sources, with 5.4 million customers across Illinois and Pennsylvania. The stock manages to pay out a dividend of $2.10 for a heaping annual yield of 5.02%. Its EPS is relatively weak – only $3.75 – but the company has a good cash flow of $4.80 per share, and the stock's ability to maintain 5.59% annual dividend growth, above-average for the industry, is not bad either. Exelon is also growing, having bid $7.9B to purchase Constellation Energy (NYSE:CEG).

Exelon is one of the U.S. leaders in operating nuclear power plants and is quickly expanding with modern electrical grids and renewable energy sources. For analysts, the recent worries about nuclear power after the Japanese earthquakes have reflected poorly on EXC.Expected revenue growth has been cut to 1.4% and earnings growth is almost non-existent at .2%. However, Exelon should generate enough excess cash to ride out this downtrend in sentiment and keep paying the high dividend. By a P/E ratio comparison and a simple DDM valuation estimate, EXC is vastly undervalued compared to its peers and still has a lot of potential. The very generous dividend from the company is just the icing on top of the cake. Exelon is one of Investment Underground's "New Dividend Kings."

Kinder Morgan, Inc. (NYSE:KMI) KMI is a leading pipeline transportation and energy storage company in North America. It owns an interest in/operates more than 37,000 miles of pipelines and 180 terminals. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel.

KMI owns the general partner interest of Kinder Morgan Energy Partners (NYSE:KMP), one of the largest publicly traded pipeline limited partnerships in the U.S. Combined, the companies have an enterprise value of approximately $55 billion. KMI is trading below our fair value estimate, as is KMP. Interested buyers should scoop up shares at these price levels or employ an at-the-money put-selling strategy to acquire shares at summer month option expirations. KMI can also offer investors correction protection should the summer markets swoon.

Disclosure: Long FAF, short FAF calls