Really? Can I actually predict what stock the great Warren Buffett would buy if he were you?
Of course not. But I can see facts and patterns.
And from those facts and patterns, I've found a great dividend stock that matches up quite well with his current holdings.
Why doesn't he own it, then?
If you're an astute reader, you're probably asking this question -- if this is such a great stock, why doesn't Buffett own it himself?
The answer's simple. The company I've found has a market capitalization of $2.25 billion. That may seem pretty big, but it's chump change to Buffett's holding company -- Berkshire Hathaway
Unless you happen to be a billionaire yourself, you don't have that problem.
Buffett would love to be you
At least from an opportunity standpoint, you and I have much better upside than Buffett. Because he's managing billions upon billions, he has to make deals like his purchase of Burlington Northern -- a huge railroad that he only expects reasonable returns on.
Reasonable returns aren't what we're used to getting from Buffett, but when you've beaten the tar out of the market for half a century, you just have too much capital to chase the small, underfollowed deals hiding in the corners of the market. How much is he hamstrung by his wealth? Here are Buffett's own words:
"It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."
Where to find those 50% returns
Of course, when Buffett first started out, he didn't generate 50%. No, he averaged more than 60% those first few years.
But that was before he was relegated to buying $40 billion companies whole. He could use his whole investing toolbox -- including taking advantage of the inefficiencies in the small-cap market.
Today, small-cap stocks are still underfollowed because they're too small for megainvestors like Buffett and Wall Street. And regular investors don't take the time to find them.
Why Buffett would like this small stock
Looking at Buffett's current stock portfolio, we can see an area of the market he loves. More than 20% of his stock portfolio is split among three banks: Wells Fargo
Here's the thing, though. All of them look expensive at first glance. Banks selling at a price-to-tangible book value below 1.5 start getting attractive to me. But Wells trades at 2.1 and M&T trades at 2.7. Meanwhile, US Bancorp trades at 3.0!
This isn't a new thing. They're almost always at higher-than-average multiples. But Buffett holds throughout and adds on dips. He added more Wells Fargo in the third quarter when Wells averaged a multiple of 1.8.
Why is this?
It's because these banks are earnings machines. You may pay a lot for their book values, but they do a lot with them by cranking out returns on that book value that dwarf their competitors' returns.
The little bank I'm thinking of trades at similar multiples to the big boys, but dwarfs even their competitor-thumping returns.
The stock Buffett would buy if he could
What's this mighty little bank?
It's called Bank of Hawaii
Bank of Hawaii trades at a price-to-tangible book value that's slightly higher than Wells Fargo's (2.3 vs. 2.1), but its return on equity is almost double (18.9% vs. 9.6%).
That return on equity advantage isn't a new phenomenon, either. And it's not the only impressive metric that Bank of Hawaii beats Wells Fargo on. B of H has historically high lending standards leading to a low percentage of bad loans (its bad loan percentage stands at just one-fifth the percentage of Wells Fargo's). And, once again, that's not a new phenomenon.
Top that off with a 3.8% dividend yield, and you have a stock Buffett would love. I'm not saying for sure that he'd be buying on dips, but based on his love of high-quality banks, I bet he'd at least strongly consider it.
Luckily for us, it's too small for him.
If banking doesn't excite you or if you're just looking for another Buffett-inspired stock idea, I invite you to read a free copy of our most recent Buffett report -- it details a health-care stock that he's been buying up. Click here to download it for free.
Anand Chokkavelu owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value and a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
U.S. Bancorp (USB) Q4 2017 Earnings Conference Call Transcript
USB earnings call for the period ending December 31, 2017.
Better Stock: Wells Fargo (WFC) vs. Citigroup (C)
The two banks have had plenty of ups and downs over the last decade or so. Here's the one I think has more "up" potential right now.
Meet the 2 Candidates Who Could Take Warren Buffett's Place
Berkshire recently narrowed down its future CEO candidates to just two people.