Buffett Bets: Four Favorites

10/28/2016 7:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

Instead of doing the tedious and somewhat fruitless work of trying to find the stocks that Warren Buffett might buy, studious investors can simply look in Buffett’s current portfolio to find some great opportunities, suggests Tim Plaehn, editor of The Dividend Hunter

Warren Buffett might be getting prepared to be a bit more active heading into 2017. His proverbial ‘elephant gun’ will be reloaded soon and he could be on the prowl for some mega deals.

Instead of doing the tedious and somewhat fruitless work of trying to find the stocks that Warren Buffett might buy, studious investors can simply look in Buffett’s current portfolio to find some great opportunities.

No mention of Buffett’s favorites would be complete without talking about his top holding, Kraft Heinz (KHC).

It became Berkshire’s top holding earlier this year and is one of the largest food companies in the world. This comes after Buffett helped orchestrate a deal for Kraft to buy Heinz last year.

The “big” play for Buffett, before he retires, could be trying to merge Kraft Heinz with another major consumer brand company to make a mega-player in the food and beverage industry. The likely target is candy and snacks maker Mondelez (MDLZ).

Even at 22 times earnings, Kraft Heinz is still fairly cheap for a $100 billion market cap powerhouse. And you’ll get the steady 2.75% dividend yield that goes along with that.
Now, Buffett has to ‘love’ Berkshire Hathaway (BRK-A) because he built the company, right? Well, considering he has over 99% of his wealth tied up in Berkshire stock, I think it is safe to say that Berkshire is certainly one of his favorite stocks.

The company is a massive force and still continues to outperform. Trading at just around 18 times next year’s earnings, it’s cheaper than the S&P 500 and yet less volatile.
The Berkshire business has some of the steadiest businesses you’ll find, generating cash from its insurance, railroad, and energy subsidiaries. Then there’s its public equity portfolio, whose dividends alone can keep the lights on at Berkshire for years.

USG Corp. (USG) is one of the few small-cap stocks that Buffett owns, with a near $4 billion market cap. The company is a maker and distributor of building materials, so it’s a play on the construction market.

Berkshire is USG’s largest shareholder, and it’s really one of those Buffett-esque investments. The company is a leader in its market, owning the popular Sheetrock brand, and operating in a business that is at the core of U.S. infrastructure: housing and construction.

At some point, Buffett could easily just take this company private, and trading at just 12 times next year’s earnings, he would be getting it for cheap.

Phillips 66 (PSX) is an oil and gas refining company and one that Buffett has been buying hand over fist. It’s now Berkshire’s sixth largest holding and it owns over 15% of the company.
It’s not out of the realm of possibilities for Buffett to end up buying all of Phillips 66. The key play here is that it’s a heck of a dividend payer.

The 3.2% dividend yield Phillips 66 is paying is very appealing to Berkshire, which means Buffett’s company is collecting some $50 million a quarter in dividends from the oil company.

Now, the other interesting thing is that investors can still buy Phillips 66 for about what Buffett has been buying shares at. Buffett has paid an average of $77 to $79 a share.

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By Tim Plaehn, Editor of The Dividend Hunter

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