How to Profit From Warren Buffett's Next Major Investment
Warren Buffett is undoubtedly one of the most prolific investors in stock market [1] history... and for good reason.
During the first decade of the new millennium (2000-2010), Buffet's Berkshire Hathaway (NYSE: BRK-A [2]) returned a blistering 76%. By comparison, the S&P 500 was down 11.3% for that period...
Performances like that are why I always like to keep an eye on where the "Oracle of Omaha" is placing his bets. After all, if Buffett can beat the S&P 500 37 out of the 45 years since he started Berkshire back in 1967, then it stands to reason he can do it again...
So after taking a look at some of Buffett's more notables moves in 2011 -- including a $5 billion investment in Bank of America (NYSE: BAC [3]), and an $8.7 billion buyout [4] of the specialty chemical company Lubrizol -- I think Buffett is getting ready to put even more of Berkshire's $37 billion in cash to work in 2012. Here's why...
Buffett still says stocks are attractive. According to Buffett's address to shareholders on CNBC last month, Buffett believes stocks will perform better than "bonds[5], gold or any other investment option over time". He followed by saying stocks still appear relatively cheap even after prices have improved from earlier this year.
But that begs the question... where will Buffett invest next?
After careful deliberation with my research staff, I think we may have found the answer in Japan.
The huge earthquake and tsunami that devastated the country last year hasn't soured Buffet's opinion on Japanese firms.
"There are lots of opportunities in Japan," Buffett said during a visit to the country to inspect a tool-making company owned by a Berkshire Hathaway subsidiary. Buffett has made bullish [6] bets on Japan's benchmark [7] Nikkei 225 index [8] through derivatives [9] contracts, according to Bloomberg News.
I think that's a sign Buffett could getting ready to buyout a major electronics manufacturer in Japan... If that happens, it could spawn a wave of buyouts as U.S. companies decide to put the $2 trillion in cash on their balance sheets to work.
But even if Buffett doesn't invest a dime in Japan, I think we can still make some significant money here.
You see, corporate America has plenty of ammo to wage takeover battles. U.S. companies have $1.9 trillion in cash sitting on their balance sheets. That's 7.4% of their total assets -- the largest share since 1959. For comparison, in the better times of 2006, liquid [10] assets came to about $1.5 trillion.
Of course that cash hoard reflects the caution many companies feel about investing in their business in an economy [11] where growth is painfully slow. But at this point I'd say there is little doubt things are improving. I'm betting that in the year ahead we will begin to see a shopping spree on Wall Street [12] as companies look for businesses to buy that will boost their own bottom lines.
I don't have to tell you about some of the heady returns you can see from owning a stock that becomes a takeover target [13]. Overnight gains of 20%... 30%... even as much as 50% aren't uncommon. But investing solely on the basis of a takeover can be risky... that's why you have to pick your candidates wisely.
So which companies could make takeover targets?
One of my favorite places to look right now is the energy patch. With energy prices high and likely to rise for years, buying smaller companies in the field has become of the fastest ways for larger companies to grow.
One such company is Approach Resources (Nasdaq: AREX [14]), an independent oil and natural gas company headquartered in Fort Worth, Texas.
Approach Resources is a small company -- just $1 billion in market cap [15]. However, it is growing quickly. In 2011, its total proved reserves increased by 52%. And because it is small, the company is at a point to where it can increase production at a rapid pace.
Last year saw not only reserves increase, but production jumped by 50%.
Approach Resources invests in various Texas shale deposit and tight-sand oilfields. Being relatively concentrated geographically gives the company a cost advantage, as well as a significant risk management advantage, as it is drilling in proven areas. Production is about 55% oil and natural gas liquids, and 45% natural gas.
Of course, this fast growth has been great for investors. In the past two years, Approach Resources has beaten the S&P 500 by 249 percentage points.
And all that makes the company highly attractive for a takeover.
But even if Approach Resources doesn't get acquired in the next 12 months, I think the overall investment theme still remains. After a shaky year in 2011, companies are going to start actively looking for more growth opportunities.
Action to Take -->Therefore, Buffett proctored or not... we can expect a strong uptick [16] in merger [17] and acquisition [18] activity within the next 12 months. As a result, I expect there's a lot of money to be made investing in potential buyout targets right now.
[Note: A major increase in mergers and acquisitions is only one of the investing trends I'm predicting to catch on in the coming year. I've made 10 more predictions [19], each of which I feel offers investors a good chance to profit over the next 12 months. To see my full list of 11 predictions, follow this link here [19].]
During the first decade of the new millennium (2000-2010), Buffet's Berkshire Hathaway (NYSE: BRK-A [2]) returned a blistering 76%. By comparison, the S&P 500 was down 11.3% for that period...
Performances like that are why I always like to keep an eye on where the "Oracle of Omaha" is placing his bets. After all, if Buffett can beat the S&P 500 37 out of the 45 years since he started Berkshire back in 1967, then it stands to reason he can do it again...
So after taking a look at some of Buffett's more notables moves in 2011 -- including a $5 billion investment in Bank of America (NYSE: BAC [3]), and an $8.7 billion buyout [4] of the specialty chemical company Lubrizol -- I think Buffett is getting ready to put even more of Berkshire's $37 billion in cash to work in 2012. Here's why...
Buffett still says stocks are attractive. According to Buffett's address to shareholders on CNBC last month, Buffett believes stocks will perform better than "bonds[5], gold or any other investment option over time". He followed by saying stocks still appear relatively cheap even after prices have improved from earlier this year.
But that begs the question... where will Buffett invest next?
After careful deliberation with my research staff, I think we may have found the answer in Japan.
The huge earthquake and tsunami that devastated the country last year hasn't soured Buffet's opinion on Japanese firms.
"There are lots of opportunities in Japan," Buffett said during a visit to the country to inspect a tool-making company owned by a Berkshire Hathaway subsidiary. Buffett has made bullish [6] bets on Japan's benchmark [7] Nikkei 225 index [8] through derivatives [9] contracts, according to Bloomberg News.
I think that's a sign Buffett could getting ready to buyout a major electronics manufacturer in Japan... If that happens, it could spawn a wave of buyouts as U.S. companies decide to put the $2 trillion in cash on their balance sheets to work.
But even if Buffett doesn't invest a dime in Japan, I think we can still make some significant money here.
You see, corporate America has plenty of ammo to wage takeover battles. U.S. companies have $1.9 trillion in cash sitting on their balance sheets. That's 7.4% of their total assets -- the largest share since 1959. For comparison, in the better times of 2006, liquid [10] assets came to about $1.5 trillion.
Of course that cash hoard reflects the caution many companies feel about investing in their business in an economy [11] where growth is painfully slow. But at this point I'd say there is little doubt things are improving. I'm betting that in the year ahead we will begin to see a shopping spree on Wall Street [12] as companies look for businesses to buy that will boost their own bottom lines.
I don't have to tell you about some of the heady returns you can see from owning a stock that becomes a takeover target [13]. Overnight gains of 20%... 30%... even as much as 50% aren't uncommon. But investing solely on the basis of a takeover can be risky... that's why you have to pick your candidates wisely.
So which companies could make takeover targets?
One of my favorite places to look right now is the energy patch. With energy prices high and likely to rise for years, buying smaller companies in the field has become of the fastest ways for larger companies to grow.
One such company is Approach Resources (Nasdaq: AREX [14]), an independent oil and natural gas company headquartered in Fort Worth, Texas.
Approach Resources is a small company -- just $1 billion in market cap [15]. However, it is growing quickly. In 2011, its total proved reserves increased by 52%. And because it is small, the company is at a point to where it can increase production at a rapid pace.
Last year saw not only reserves increase, but production jumped by 50%.
Approach Resources invests in various Texas shale deposit and tight-sand oilfields. Being relatively concentrated geographically gives the company a cost advantage, as well as a significant risk management advantage, as it is drilling in proven areas. Production is about 55% oil and natural gas liquids, and 45% natural gas.
Of course, this fast growth has been great for investors. In the past two years, Approach Resources has beaten the S&P 500 by 249 percentage points.
And all that makes the company highly attractive for a takeover.
But even if Approach Resources doesn't get acquired in the next 12 months, I think the overall investment theme still remains. After a shaky year in 2011, companies are going to start actively looking for more growth opportunities.
Action to Take -->Therefore, Buffett proctored or not... we can expect a strong uptick [16] in merger [17] and acquisition [18] activity within the next 12 months. As a result, I expect there's a lot of money to be made investing in potential buyout targets right now.
[Note: A major increase in mergers and acquisitions is only one of the investing trends I'm predicting to catch on in the coming year. I've made 10 more predictions [19], each of which I feel offers investors a good chance to profit over the next 12 months. To see my full list of 11 predictions, follow this link here [19].]
By Andy Obermueller
Published 03/14/2012
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