Warren Buffett has his ‘elephant gun’ locked and loaded – and it's aimed at Australian stocks. "If you come back in two or three years, you will find we have got four or five Australian equities," Buffett said in an interview with Fairfax Media. "There is money to be made in Australian equities over the next 10, or 20, or 30 years," he said.
The interview came after insurer IAG (ASX:IAG) announced that it has formed a ‘strategic relationship’ with US-based Berkshire Hathaway (NYSE:BRK.B), of which Buffett is chief executive.
From July 1st, Berkshire will receive 20% of IAG’s gross written premium (what is effectively an insurer’s revenue) and pay 20% of claims over the next 10 years. Furthermore, Berkshire will buy a 3.7% stake in IAG via a placement for $500m, or $5.57 a share.
Because premiums are received before claims are paid – and the interval between can extend over many years – an insurer can invest the funds in stocks, bonds or other assets and keep the investment returns for itself. IAG’s management expects gross written premium of around $11.4–11.8bn in 2015, implying Berkshire will receive roughly $2.3bn a year in premiums from the deal.
"The money is going to get invested in Australia … I will certainly be looking at the banks. In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks," Buffett said.
So what other Aussie stocks might he have his eye on? Buffett has previously said he looks for four things when buying a stock: a company he understands; able and honest management; a sustainable competitive advantage (a business’s ‘moat’, as he likes to say); and a sensible price.
Several stocks probably tick his first few boxes – condom and glove maker Ansell (ASX:ANN), funeral home operator InvoCare (ASX:IVC), Australia's largest pathology provider Sonic Healthcare (ASX:SHL), Woolworths (though maybe only after the change of management), or Wesfarmers (ASX:WES). High quality companies like these don’t come cheap though, and finding stocks with a decent margin of safety is the trump card.
In 2013, Buffett tried to buy US-based exchange operator NYSE Euronext, but failed to reach an agreement due to price. With that in mind, would Buffett be interested in local stock exchange operator ASX (ASX:ASX)?
We can only guess, but with a natural monopoly, good management, solid balance sheet, plenty of free cash flow and a 4.5% dividend yield, we think ASX might be one elephant in his sights.
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