Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), the conglomerate led by billionaire investor Warren Buffett, certainly has some money to invest. At the end of the second quarter, Berkshire had more than $146 billion of cash and equivalents on its balance sheet -- even when you consider Buffett likes to keep at least $20 billion on hand, that's a ton of buying power.
What's more, it looks like the Oracle of Omaha might finally be ready to start putting money to work. So far in the third quarter, Berkshire has completed a $10 billion (including debt) acquisition of natural gas assets to add to its energy business, and has invested more than $2 billion to increase its Bank of America (NYSE:BAC) stake.
And while we have no idea what stocks Buffett and his stock-pickers might be considering, two stocks that could be excellent additions to Berkshire Hathaway's portfolio are Realty Income (NYSE:O) and Lemonade (NYSE:LMND).
Bulletproof income and a time-tested model
Realty Income is a real estate investment trust, or REIT, that primarily owns single-tenant net-leased properties leased to retail tenants.
While the word "retail" might understandably give you reservations, Realty Income invests in the right kind of retail. Specifically, the company's tenants operate three different types of businesses:
- Discount-oriented retail. Think dollar stores and warehouse clubs. These businesses are recession-resistant and are also less vulnerable to e-commerce disruption than most other types of retail.
- Service-based retail. Auto service centers and health clubs are two examples. While the COVID-19 pandemic hasn't exactly been a positive catalyst for these types of retail, they should be just fine long-term as they are immune to e-commerce headwinds.
- Non-discretionary retail. In the pandemic, businesses that sell things people need have done quite well. And these businesses (think drug stores and convenience stores) also do well no matter what the economy is doing.
In addition, tenants are on long-term leases with gradual rent increases built in. We already know Buffett likes this business model, as fellow net-lease retail REIT STORE Capital (NYSE:STOR) is in Berkshire's portfolio. And since Realty Income is several times the size of STORE, it could be a great way for Berkshire to deploy some of its capital.
The future of Buffett's favorite business
It's no secret that Buffett is a big fan of the insurance business. GEICO and Berkshire's reinsurance operations are the backbone of the entire conglomerate. So while recent-IPO insurance company Lemonade might seem a bit too high-tech or speculative for Buffett, I'm not so sure.
Lemonade's business model is to leverage modern technology to make the insurance-buying process as quick and easy as possible, as well as affordable. Through its artificial intelligence-powered platform, Lemonade enables customers to get quotes in just a couple minutes and file claims quickly and easily.
It's also worth mentioning that Berkshire hasn't been afraid to add some up-and-comers in industries that Buffett loves. To name a recent example, Buffett has been a major fan of payment processing for some time, with investments in American Express, Visa, and Mastercard in Berkshire's stock portfolio. And when up-and-coming Brazil-based payment processing business StoneCo (NASDAQ:STNE) went public a few years ago, Berkshire bought more than 4% of the outstanding shares. Lemonade could play a similar role in the company's investment strategy.
Would Buffett consider any of these?
Just to reiterate, there is no indication that Buffett or anyone else at Berkshire Hathaway is actually considering any of these stocks. They just have some characteristics Buffett has been attracted to in the past and could be a good fit in Berkshire's portfolio.
That said, regardless of whether Warren Buffett has interest in these companies or now, these are two interesting businesses that could be excellent additions to a portfolio that aims to achieve a nice mix of growth and income over the long run.