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What Will Warren Buffett Buy Next With His $86 Billion War Chest?

By Matthew Frankel, CFP® - Mar 4, 2017 at 8:27AM

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Berkshire Hathaway is sitting on a massive cash stockpile. How will Buffett and company put it to work?

According to Berkshire Hathaway's (BRK.A 0.07%) (BRK.B 0.04%) latest annual report, Warren Buffett and his team are sitting on an $86 billion stockpile of cash. While the Oracle of Omaha likes to keep at least $20 billion in cash or equivalents on the sidelines at all times, this still leaves a lot of money just waiting to be put to work. We have no way of knowing exactly what Berkshire will buy next, but we do know what the company is looking for.

Berkshire's cash hoard is different than most others

Berkshire Hathaway is not the only company with a massive cash hoard, and it is certainly not the biggest. The tech sector in particular has several players with big stockpiles of cash, such as Apple (AAPL 0.00%), Microsoft, Alphabet, Cisco, and Oracle.

Warren Buffett at Berkshire Hathaway's annual meeting.

Image Source: The Motley Fool.

However, these companies have most their cash stashed overseas, and can't bring it back without facing a large tax bill. In fact, Moody's estimates that about 87% of these five tech giants' cash is stashed overseas.

Berkshire Hathaway, on the other hand, doesn't have this problem to worry about. 95% of Berkshire's $86 billion stockpile of cash is held by U.S. entities. And, the remaining 5% would trigger big repatriation taxes, as most of it was earned in companies that impose big corporate taxes, which would be used to offset U.S. taxes upon repatriation of the cash.

In a nutshell, not only does Berkshire have $86 billion in cash, but this is cash that can actually be used without major tax consequences.

How Berkshire Hathaway chooses its acquisition targets

The exact process Warren Buffett and his team use to evaluate potential acquisition targets is a closely guarded secret. However, Berkshire Hathaway does actively encourage prospective acquisitions to contact the company, so long as the business meets six criteria:

  1. The business must be large. Berkshire defines this as having at least $75 million of pre-tax earnings per year. The company will make an exception if it can fit into one of its existing business units.
  2. The company must be able to demonstrate that it is consistently profitable. Buffett and his team have no interest in investing in unprofitable companies or companies that may or may not become profitable.
  3. The business must have little or no debt and still produce good returns on equity.
  4. There must already be management in place. I'd add to this and say that there must be good management in place. I can't emphasize enough the value Buffett places on good managers.
  5. The business must be simple. Buffett doesn't invest in tech companies or biotechs or anything else that he doesn't understand.
  6. There must be an offering price on the table, even if it's just preliminary.

Berkshire's target acquisition range is $5 to $20 billion. This is not a set-in-stone rule, as the company has certainly made exceptions in the past. However, the larger the company the greater Berkshire's interest will be.

It would be foolish to speculate as to which exact company Buffett and his team may buy next. However, it is fair to say that was such a large stockpile of cash, Brookshire will be on the prowl for an acquisition that meets its criteria.

Or, will Buffett and company buy more stocks instead?

In addition to its fully owned businesses, Berkshire Hathaway has a stock portfolio consists of about 45 different companies as of this writing. The stocks that Warren Buffett is buying and selling are closely followed by millions of investors.

We already know for a fact that some of Berkshire's cash hoard is being spent on common stocks in 2017. In an interview with CNBC, Buffett revealed that since the start of the year, Berkshire has more than doubled its stake in Apple,and now owns about 2.5% of the tech giant.

Just like with Berkshire's acquisitions of entire companies, it would be silly to speculate on what stocks Buffett and his team will buy next, but the reasons behind the Apple investment are a good example of what he looks for.

Buffett said that he decided to boost Berkshire's Apple stake because of the company's consumer-retaining power. After all, people who use iPhones typically upgrade to a newer model of the same product -- over and over. Buffett also praised CEO Tim Cook's capital deployment strategies. In addition, Apple trades for a relatively low valuation when compared with the rest of the market, and looks cheaper still if you account for the company's massive stockpile of cash.

What it means to you

As I've mentioned before, it would be silly to try to figure out what companies are stocks Berkshire Hathaway will buy next. However, you can use the principles and rules discussed here to find Buffett-like stocks for your own portfolio.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$417,700.00 (0.07%) $298.56
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$278.40 (0.04%) $0.12
Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (0.00%) $0.00

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