Here at The Motley Fool, Warren Buffett is our quintessential investor. He examines stocks as businesses, rather than just ticker symbols. He targets long-term holding periods, taking emotion out of the equation. To top it all off, he's one of the most successful investors of all time because he looks for solid companies that can survive in any economic environment.
Since the 1950s Buffett has managed to turn less than $10,000 in savings into what Forbes estimates is a $74 billion fortune. Because of his resounding success, investors and Wall Street analysts tend to closely follow the buys and sells of his conglomerate, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), even following the Oracle of Omaha's trades to a "t" in hopes of duplicating his success over the long term.
But it's anyone's guess which stock Warren Buffett and Berkshire Hathaway might buy next. Buffett isn't exactly forthcoming about the companies on his watchlist; that would allow his followers to beat him to the punch, defeating the purpose of his bargain-hunting strategy.
With this in mind, I'll give my best guess as to which three stocks Warren Buffett may buy next. In Buffett fashion, I sought companies that are capable of thriving in most economic environments, that have a recognizable brand or product, and that are healthfully profitable and forecast to grow at a modest pace moving forward.
1. Whirlpool (NYSE:WHR)
Warren Buffett really likes when companies are the market share leaders in their category, making Whirlpool, the world's leading appliance-maker, instantly appealing.
Now far removed from the Great Recession, Whirlpool is seeing its European business stabilize and has enjoyed a solid rebound in the U.S. market, where GDP growth roared higher by 5% in the third quarter of 2014.
Key to Whirlpool's long-term strategy is a combination of acquisitions, cost controls, and organic growth in developed and emerging markets. Whirlpool is already the market share leader in the U.S., Brazil, U.K., Canada, France, Russia and Italy, and it's in the top four by market share in a few other key markets, including China and India, which are capable of growing at a much faster pace than developed nations. This geographic diversity, coupled with an effort to control expenses, has allowed Whirlpool's top and bottom lines to expand at a steady pace.
Whirlpool has also been a busy bee when it comes to making acquisitions or taking majority stakes in overseas companies. Since 2013 Whirlpool has acquired a majority interest in China's Hefei Rongshida Sanyo Electric and Italy's Indesit, a large appliance-maker throughout Europe. The moves instantly boost Whirlpool's presence in Europe and Asia and should quickly add to the company's profitability.
Finally, Whirlpool recently unveiled its forward-looking EPS guidance, which has the company nearly doubling its GAAP EPS between 2015 and 2018 from $10.75-$11.75 to $22-$24. By those standards, Whirlpool is valued at a mere eight times 2018's EPS forecast. Tack on a cumulative 74% increase in its dividend over the past three years, and you have the makings of a Buffett stock!
2. NextEra Energy (NYSE:NEE)
Buffett doesn't necessarily need the companies he buys to deliver high EPS growth prospects like Whirlpool. He's more than happy to sit back and collect steady profits from companies that offer basic-needs goods and services. NextEra Energy fits the bill, as electricity is a basic need that will remain in constant demand regardless of how well the U.S. economy is performing.
What makes NextEra Energy unique among U.S. utility companies is that it's the single largest generator of electricity from renewable energy.
As of the end of 2013 NextEra had 42.5 MW of generating capacity. Out of that capacity, an EI Energy Intelligence report notes that NextEra generated 52% of its power clean natural gas, 27% from emissions-free nuclear, and 16% from wind power, which is comprised of nearly 9,300 wind turbines across 19 U.S. states and four Canadian provinces. Alternative-energy projects cost a pretty penny up front, which is one reason why NextEra's debt levels are a bit higher than its peers'. However, the long-term cost savings of renewable energy compared to fossil fuels should give NextEra a competitive advantage for years to come.
NextEra is also hungry for more renewable, and predictable, sources of energy. In December NextEra announced the purchase of Hawaiian Electric Industries (NYSE:HE) for $2.6 billion. The purchase allows NextEra to buy Hawaii's dominant electric company, to get its hands on Hawaiian Electric's biomass-powered facility, and to beef up its regulated holdings. Regulated electric markets are extremely predictable, as they aren't exposed to wholesale price fluctuations. Thus the move will add even more predictability to NextEra's growth potential.
On top of that, NextEra's annual payout has more than doubled since 2005 to a current yield of 2.7%. With a commitment from management to pay out around 55% of its EPS in the form of a dividend annually, long-term investors like Buffett would appreciate its consistent dividend growth.
3. AvalonBay Communities (NYSE:AVB)
Lastly, I'm going off-the-cuff with this last pick, because it isn't exactly "cheap" by the normal Buffett standards. However, real-estate investment trust AvalonBay Communities does have what I believe to be many attractive qualities that would get Warren Buffett excited.
AvalonBay Communities owns apartment-home communities that target middle- and upper-income individuals. It was hammered during the Great Recession as housing and property values were creamed, but that's history now, and Avalon is one of the best-run apartment REITS, in my opinion.
My main reason for believing in Avalon is the nature of the current housing industry and the type of customer it attracts. Because interest rates are much more likely to rise than they are to fall over the next five years, the rental pricing power of apartment communities like Avalon should only rise. Higher lending rates serve to keep renters renting instead of taking mortgages to buy homes. Additionally, Avalon's focus on higher-income individuals means it may be less affected by downswings in the U.S. economy.
Let's also not forget that as a REIT, AvalonBay is required to pay out at least 90% of its profits in the form of a dividend. Over the past decade, AvalonBay's payout has increased by a cumulative 66%, and it currently pays out $4.64 per share on an annual basis, equating to a yield of 2.7%. It's not the cheapest stock on the block, but among apartment REITs, it's the creme de la creme.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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