Looking For Buffett's Next Play

Includes: BRK.A, HPQ, IBM, TESO
by: The Value Investor

Normally when an 81-year old travels around the world, no one seems to care.

However when Warren Buffett makes travel arrangements, investors immediately start speculating which companies the Oracle of Omaha would buy this time. Today, Warren is in Japan looking for bargains with a competitive edge and strong management. The negative sentiment after this year's earthquake and corporate governance worries after Olympus' revelations in recent weeks is overdone and provides opportunities for long term investors.

Buying spree

Buffett has been on a buying spree recently. Besides a $5bn investment in Bank of America (NYSE:BAC) and the $9bn takeover of Lubrizol, Berkshire (NYSE:BRK.A) announced it had been acquiring a stake in IBM for over $10bn. The latter took many by surprise as Buffett normally steers away from technology companies (4 Reasons Buffett is Going Blue)

Besides these investments, Berkshire announced last September that it would repurchase its own shares at a price of maximum 110% of book value, until Berkshire's cash levels would approach $20bn. The recovery in Berkshire's shares (trading at $113k recently), implies a 16% premium to its book value at the end of last quarter.

Substantial cash pile

Despite the fact that Buffett already spend $24bn in the last quarter, he could still easily surprise the market with another investment. Berkshire recently received a $3.3bn payment from its investment in GE. Combining this with improved operational performance of Berkshire's subsidiaries has led to only a 27% reduction in cash levels to about $35bn. Buffett feels comfortable spending until cash levels hit $20bn, a cash level he wants to maintain to meet potential insurance obligations.

Foreign investments

Despite the fact that Berkshire's last three purchases were American, it has invested in foreign companies over the last decade as investment opportunities in the US seemed to dry up. In 2006 Berkshire bought an 80% stake in Iscar (Israel), it held a significant stakes in China's PetroChina (NYSE:PTR) and still holds stakes in steelmaker Posco (NYSE:PKX) (South Korea) and Germany's Munich Re.

Today he announced he'd like to expand his 3.6% stake in UK's Tesco if the price would come down.

On the crisis

In general Buffett finds equity prices becoming more attractive, while debt remains unattractive. The Eurozone has structural political flaws in its design which causes additional stress on top of the debt servicing costs. Buffett feels more confident owning US debt (despite the worrying signs coming from the special US Budget committee, responsible for finding $1.2tn in annual savings) as the Dollar maintains its status as the prime world's reserve currency.

Potential candidates

According to Buffett Berkshire has several buy orders in the market including UK's Tesco (NASDAQ:TESO). After overcoming his aversion to technology investments by announcing a stake in IBM some commentators have started rumors about a potential stake in Hewlett Packard (NYSE:HPQ) which has been plagued with leadership problems over the last years. While Buffett did not want to comment on these market rumors he explicitly ruled out investing in Jefferies, financial firm coming under speculators attack as he claims he does not know the company well enough, and its size is simply too small to provide an adequate return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.