MW These 8 stocks could be Berkshire Hathaway's next big bets

By Mark Hulbert

Only a handful of large-cap stocks satisfy Warren Buffett's price and profitability criteria

Warren Buffett has long complained that Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ has become so huge that it's difficult to find acquisitions that are both undervalued and large enough to make a material difference to the company's bottom line.

Buffett's remarks at Berkshire Hathaway's annual shareholder meeting in Omaha, Neb., this Saturday may shed some light on whether the current investment landscape is attractive. (Berkshire made it clear that two topics won't be discussed: politics and what the company is buying and selling.) Berkshire does have money to spend - it had a record cash position of $334 billion as of the end of last year.

That said, 10 large-cap stocks satisfy a complex algorithm that picks stocks that would match Berkshire Hathaway's long-term return. The company already owns two of them, leaving eight that would be appealing opportunities for anyone with an investing mindset similar to Berkshire Hathaway's.

The study that devised this complex algorithm was published in 2018 in the Financial Analysts Journal. Entitled "Buffett's Alpha," the study was conducted by three principals at AQR Capital Management, each of whom has strong academic credentials: Andrea Frazzini, David Kabiller and Lasse Pedersen.

Although the algorithm is complex, conceptually it is relatively simple: Stocks satisfy the algorithm if they simultaneously have low price-to-book ratios and betas and also high dividend-payout ratios and profit growth rates. For the table below, I applied the algorithm, as faithfully as possible, to stocks in the S&P 1500 index (courtesy of FactSet data).

A total of 59 stocks made the cut. There are 49 stocks on the list - that is, 78% - with market caps smaller than $10 billion (the cutoff I used for a stock to be considered a large cap). This distribution skewing toward smaller stocks confirms Buffett's belief that his job would be a lot easier if Berkshire Hathaway were not so large.

Ten of the stocks have market caps above $10 billion. Two are already in Berkshire's investment portfolio: Citigroup (C) and Kraft Heinz $(KHC)$. The other eight are listed in the table below.

Call them the "Buffett 8": They are Duke Energy $(DUK)$, Valero Energy $(VLO)$, Fifth Third Bancorp $(FITB)$, Steel Dynamics (STLD), Healthpeak Properties $(DOC)$, J.M. Smucker $(SJM)$, Jones Lang LaSalle $(JLL)$ and Coherent $(COHR)$.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Warren Buffett proves, once again, why he's the best

Also read: Will Berkshire Hathaway stock be a buy after Warren Buffett's annual shareholders meeting?

-Mark Hulbert

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May 02, 2025 16:43 ET (20:43 GMT)

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