Berkshire Hathaway is only thinking big with its extra cash on hand but other investors have better options including the small and mid-cap value stocks. ·Zacks
Welcome to Episode #83 of the Value Investor Podcast
Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.
It’s a big time of the year for value investors as Berkshire Hathaway’s Annual Letter to Shareholders was recently released.
For value investors, it’s like the Super Bowl and World Series all rolled into one. Berkshire’s Chairman, Warren Buffett, has also made the rounds of various television stations, including CNBC, for his customary question and answer segments so value fans can absorb even more of his investing wisdom.
Berkshire Has Over $100 Billion in Cash
Berkshire ended 2017 with a cash hoard of $116 billion, which was also boosted by the corporate tax cuts.
With that much cash on hand, it’s not surprising that Buffett talked about doing big acquisitions. He also said that they would be patient and wait to find the right deals.
Berkshire’s “Problem”
But the incredible cash hoard only amplified the “problem” that Berkshire and Buffett have had for several years.
With that much cash on hand, they are mostly restricted to what Buffett said: big acquisitions. Additionally, they’re pretty much restricted from taking an equity position in nearly all companies except the largest ones.
It’s not surprising, therefore, that they own companies like Apple. More recently, Berkshire also added $19 billion market cap Teva to their portfolio.
But being that large, and having that much cash, means they really can’t buy into most small or mid-cap companies. Additionally, they could buy some small and mid-caps outright, but it would be impractical, and would barely put a dent in the $116 billion stash of cash.
They’re unlikely to buy, say, 100 small cap companies in order to put the $116 billion in cash to use.
If Only Buffett Could Buy Small and Mid-Caps Again
But regular value investors don’t have Buffett’s problem. They’re not limited to only the big caps. The world is their investing oyster.
Tracey ran a screen looking for companies with a market cap under $10 billion, a Zacks Rank of #1 (Strong Buy) or #2 (Buy), a forward P/E under 15 and a P/B ratio under 3.0.
She got a healthy list of 190 stocks.
Which have Buffett characteristics such as a moat or a strong brand?
5 Stocks That Buffett Probably Wishes He Could Buy
1. The Greenbrier Companies, Inc. (GBX) makes rail cars. Berkshire already owns a railroad so it makes sense that they buy the equipment maker too. Greenbrier has a market cap of just $1.5 billion and a forward P/E of 12.8. And even though Berkshire doesn’t pay a dividend itself, it doesn’t mind collecting them. Greenbrier has a dividend yield of 1.7%.
2. Helen of Troy Ltd. (HELE) owns many of the brands that people use every day including the OXO brand which makes cooking utensils and gadgets and is popular for cooks, Vicks, Braun, Revlon, Hot Tools, Pert shampoo and Brut cologne among others. It has a market cap of just $2.5 billion and trades with a forward P/E of 13.
3. Lithia Motors, Inc. (LAD) owns auto dealerships around the United States. Berkshire Hathaway already bought a privately held dealership company a few years ago but Lithia is one of the largest with a market cap of $2.7 billion. It’s cheap, with a forward P/E of just 10.5. Investors also get a dividend, yielding 1%.
4. Copa Holdings S.A. (CPA) is one of the largest Central American airlines. Based out of Panama, it is expanding in the growing Colombia and Brazil markets. Berkshire already owns shares in several US airlines but no foreign airlines. It has a market cap fo $6.2 billion and is expected to grow earnings by 20% in 2018.
5. TrueBlue, Inc. (TBI) is a niche staffing company which provides industrial staffing in the United States, Canada and Puerto Rico. It generated $78 million in free cash flow in 2017 and is cheap, with a forward P/E of just 12.7. TrueBlue is a small cap, with a market cap of just $1.1 billion.
In addition to these five stocks, the screen also gave a dozen small banks and home builders, both of which continue to be cheap.
What else should you know about investing better than Buffett?
Tune into this week’s podcast to find out.
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