What Buffett Is Buying Next

Every so often, Berkshire Hathaway (NYSE: BRK-B  ) Chairman Warren Buffett meets with business school students. Because so few people ever get to sit down with the Oracle of Omaha, those who do have a responsibility to take good notes.

The folks at The Ben Graham Centre for Value Investing in London, Ontario, did just that.

What Buffett had to say
According to those notes, in addition to his usual advice to think long-term, read a lot, and take advantage of market volatility, Buffett said:

The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly.

That means "Buy China," and that's because, as National Geographic Editor-in-Chief Chris Johns wrote in a recent column, "The shock waves of its growth reverberate in every corner of the globe."

But don't buy it blind
"Buy China" is interesting advice, given that Buffett recently sold out of his somewhat controversial position in PetroChina (NYSE: PTR  ) . The explanation there was that Berkshire had already made a lot of money on the investment and the valuation was looking stretched.

So while Buffett is bullish on China, he's still paying close attention to valuation -- and would likely urge us all to do the same.

Where to start
Buffett's modus operandi, however, suggests that he works on identifying superior companies first and then waits for market volatility to give him his buy-in price. Using some of the financial criteria Buffett says he looks for in acquisitions (at least $75 million in pre-tax earnings, consistent earnings power, and good returns on equity with little debt), here are a few Chinese companies he may be looking at today:

Company

TTM EBT*

3-Year EPS Growth

Return on Equity

NetEase.com (Nasdaq: NTES  )

$165

43.3%

40.1%

WSP Holdings (NYSE: WH  )

$104

78.8%

34.1%

Mindray Medical (NYSE: MR  )

$96

35.3%

35.3%

*Earnings before taxes, in millions.

If Buffett were able to consider smaller companies, these might also be candidates:

Company

TTM EBT*

3-Year EPS Growth

Return on Equity

SORL Auto Parts

$13

17.1%

16.5%

Jinpan International (AMEX: JST  )

$19

50.9%

22.2%

E-House (NYSE: EJ  )

$52

71.1%

25.4%

*Earnings before taxes, in millions.

Where to go next
Each of these companies is a quality operator with enormous growth potential as part of China's macro story. Jinpan will benefit alongside the build-out of energy infrastructure, SORL with the spread of automobiles, NetEase as more of the country moves online, and so on.

And the good news is -- thanks to recent volatility in the Chinese stock market, these stocks have gotten cheaper:

Company

Current
P/E

Dec. 2007
P/E

WSP Holdings

7

10

SORL Auto Parts

9

13

NetEase.com

16

17

Jinpan International

17

18

E-House

27

61

Mindray Medical

46

63

Great opportunity, great price
This is one reason why our Motley Fool Global Gains team is so excited for our June research trip to China. Although the country's enormous potential remains unchanged, the country's stocks are down some 13% since last year's research trip.

That means more -- and more compelling -- opportunities for long-term investors like us.

If you'd like to see what we find in China and get all of our real-time research -- live from the field -- in your inbox, put your email address in the box below. If we come back with even half the ideas we had last year, it will be well worth your time.

Tim Hanson owns shares of Berkshire Hathaway. The Motley Fool also owns shares of Berkshire Hathaway. Berkshire is a Motley Fool Stock Advisor and Inside Value recommendation. Netease.com and Mindray Medical are Rule Breakers picks. To learn more about the exotic nature of the Fool's disclosure policy, click here.


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