AOL Money & Finance

Buffett's big buy: Our top picks include Allstate, Lowe's, Target

Posted May 11th 2007 8:49PM by Sarah GilbertSarah Gilbert RSS Feed
Filed under: Deals, Newspapers, Magazines, General Electric (GE), Allstate Corp (ALL), Lowe's Cos (LOW), Lehman Br Holdings (LEH), Progressive Corp,Ohio (PGR)

More

When Warren Buffett announced he wanted to use between $40 and $60 billion to buy a company several days ago, picking a target for the billionairest of all billionaires became the favorite pastime of financial writers everywhere -- and our bloggers were as eager as anyone else to come up with just the thing for the guy who already has everything (and everything, in this case, includes bunches of shares of companies as diverse as dull sheetrock manufacturer USG Corp. (NYSE: USG) to hip shoe company Nike Inc. (NYSE: NKE)).

Of course, Buffett's needs are unique. First of all, the company has to be both big and a good value -- no 80x P/E multiples for Warren. It has to be a relatively simple business (I'm thinking nanotech is out), have a good management team and no dark and dirty secrets (so sub-prime lenders are probably off the list). Finally, the company should have solid, long-term competitive advantages.

Sheldon Liber suggests a couple that might make the grade: Allstate Corp. (NYSE: ALL), the insurance company, which at about $38 billion in market capitalization and a 7.8x P/E ratio fits both the "big" and "cheap" qualifiers. Plus, we all know that Warren Buffett loves insurance companies, and given its retail approach, it's not much of a competitor with longterm portfolio company GEICO. Emerson Electric (NYSE: EMR) also seems a good candidate with its $37 billion market cap and 19x P/E ratio -- but is it simple enough? Its business is, according to Hoover's, making "a host of electrical, electromechanical, and electronic products, many of which are used to control gases, liquids, and electricity." Hmmm.

When Gary Sattler suggests Warren might buy General Electric Co. (NYSE: GE)'s plastics division, it's a good concept (simple, well-managed) but the price is way too low at around $10-12 billion. A commenter, however, brings up a good replacement in Lowe's Companies Inc. (NYSE: LOW); it has a $47 billion market cap and a reasonable P/E ratio of 15.5x. What's more, it has none of the bad-management baggage of competitor Home Depot Inc. (NYSE: HD). Does it have a "moat," though? I suppose that's a question for Warren. He does own some of each company, meaning that he's already emotionally invested in the sector (a plus) although it's obvious from our near-tie in the Battle of the Brands that neither holds a substantial consumer-facing edge competitively.

What else could be in Warren Buffett's little black book? Doug McIntyre wonders about the newspaper industry, although none of them are nearly large enough, and finally settles on a leveraged transaction involving PepsiCo, Inc. (NYSE: PEP). At over $100 billion in market capitalization, it's too big, and there is the problem of Buffett's lifetime love affair with the more-expensive Coca-Cola Co. (NYSE: KO). I doubt there's any argument that could convince Buffett that buying Pepsi (great management team aside) that leveraging himself would make sense.

Peter Cohan adds his opinion to an oft-repeated speculation, that Buffett might buy GEICO competitor Progressive Corp. (NYSE: PGR). Peter likes its leadership in the homeowner's insurance industry, and notes that aging chairman Peter Lewis may be interested in selling.

So, what do I think Buffett might buy? I've discarded ideas like Valero Energy (NYSE: VLO) (way, way too expensive) and Lehman Brothers Holdings Inc. (NYSE: LEH) (just a little too expensive) and Ikea International (too little, I think, although it's privately held). I've finally decided I like Target Corp. (NYSE: TGT) -- just the right size with a $50 billion market cap, a P/E ratio of 18x is only a little expensive, and the company has a clear competitive advantage with its stylish product lines and low prices. It's a simple business and the headquarters are in the Midwest, too; Warren will be right at home in one of the store's snack shops, sipping a Coke and watching the competent management team go about its business.

Tags: all, allstate, buffett, emerson electric, EmersonElectric, emr, ge, ge plastics, general electric, GeneralElectric, GePlastics, hd, home depot, HomeDepot, low, lowe's, nike, nke, usg, warren, warren buffett, WarrenBuffett, what would buffett buy?, WhatWouldBuffettBuy?

Reader Comments (Page 1 of 1)

Symbol Lookup
IndexesChangePrice
DJIA+132.7910,450.95
NASDAQ+29.972,176.01
S&P 500+14.861,106.24

Last updated: November 24, 2009: 08:53 AM

BloggingStocks Exclusives

Hot Stocks

DailyFinance Headlines

Latest from BloggingBuyouts

TheFlyOnTheWall.com Headlines

BioHealth Investor Headlines

WalletPop Headlines

My Portfolios

Track your stocks here!

Find out why more people track their portfolios on AOL Money & Finance then anywhere else.

  • My Portfolio
  • Create a New Portfolio

BloggingStocks Partners

More from AOL Money & Finance

WalletPop Headlines