Let's face it: As the longtime CEO of the world's most successful diversified financial holding company, and currently the world's fourth-richest man, Warren Buffett is by far the most famous investor alive today. Let it suffice to say, then, most people can't help but wonder what he'll do next.
Your slice of the pie, only bigger
I don't know about you, but I'm convinced it's a bad idea to disagree with Buffett when he says any given stock is cheap. After all, it's not too often we get stock-specific valuation tips from the Oracle of Omaha.
You should be intrigued, then, that Buffett himself said just a few months ago that he'd be willing to buy shares of Berkshire at prices of up to 1.2 times book value, while at the same time putting his money where his mouth is by repurchasing a block of 9,200 Class A shares when it became available at around 116% of book value.
Could he raise his limit again? Sure. That self-imposed ceiling of 1.2 was raised in December when the previous limit of 1.1 proved "unrealistic," anyway.
That's why I'm willing to go out on a limb to say Buffett will repurchase more of Berkshire's shares this year, even if it means once again raising the limit ever so slightly. In the end, if and when that happens, shareholders can rest assured knowing the decision was a good one considering Buffett quite literally the best seat in the house to be able to predict where Berkshire is headed.
On Buffett's terms, Berkshire will lose to the market
That's right, I said it. I think there's a good chance Berkshire will actually lose to the market this year, but only on Buffett's terms.
So why is this okay? As I mentioned above, Buffett believes the best measure of value for his company comes not from looking at its stock price, but instead by calculating its actual book value. Even if Berkshire's stock price continues to outpace the S&P 500 as it has so far in 2013 (rising 14.2% year to date versus the S&P's return of 9.3%), its relative book value could still struggle to keep up.
In addition, here's what Buffett himself wrote on the topic earlier this month:
To date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. (...) But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five-year wins will end.
As Buffett says, "Price is what you pay. Value is what you get."
Buffett will bag another elephant
Sure, Buffett may have used $12 billion in Berkshire's cash last month in a joint deal with 3G Capital to acquire H.J. Heinz, but he's already publicly stated his trigger finger is just itching to make another big buy. Sure enough, despite the Heinz acquisition, in his most recent shareholder letter, Buffett also lamented his "inability to make a major acquisition" in 2012.
So, who might Buffett have his eye on now? As I suggested last month, and keeping in mind Buffett's longstanding fondness for the agriculture industry, I wouldn't be surprised if he tried to purchase a company like heavy equipment king Deere & Company (NYSE: DE ) , whose shares currently trade for less than 11 times trailing earnings and under 10 times forward estimates. Deere's current market capitalization is a whopping $34 billion, but that should still be well within Buffett's reach when we consider his ever-growing cash pile and demonstrated willingness to selectively issue Berkshire shares given a truly compelling opportunity.
If Buffett wants to fire his gun more than once, however, it might make sense for him to pick up a couple of smaller holding companies like Leucadia National (NYSE: LUK ) and Markel (NYSE: MKL ) , whose respective market caps are much more manageable at $6.5 and $4.9 billion. After all, Berkshire is already working with Leucadia in a 50/50 commercial lending joint venture (aptly named Berkadia).
Markel -- which isn't called "baby-Berkshire" for nothing -- would fit in nicely given its specialty insurance operations and a knack for making smart long-term acquisitions. What's more, in buying Markel, Buffett would also gain renowned value investor and CIO Tom Gayner, who has also been compared to Buffett himself a time or two.
More expert advice from The Motley Fool
Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway’s book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool’s premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe’s take on Berkshire!