Personal Finance
PLD

2 Stocks Warren Buffett Should Buy Now

Warren Buffett speaking with the media.

In its second-quarter earnings report, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) revealed that its cash hoard has grown to nearly $100 billion . Warren Buffett says that he'd like to put much of this cash to work, but attractive investment opportunities have been difficult to come by. With that in mind, here are two stocks that could be excellent additions to Berkshire's stock portfolio.

Company Recent Stock Price Dividend Yield
Realty Income (NYSE: O) $57.93 4.4%
Prologis (NYSE: PLD) $63.62 2.8%

Data source: TD Ameritrade . Stock prices and dividend yields as of 9/1/2017.

Berkshire recently bought a net-lease REIT

During the second quarter, Berkshire added a $377 million stake in real estate investment trust Store Capital (NYSE: STOR) , which specializes in net-lease real estate. Most of the company's 1,750 properties are leased to service- or retail-based tenants.

Warren Buffett speaking with the media.

Image source: The Motley Fool.

It's easy to see why net-lease real estate could be a good fit for Berkshire's investment goals. Net-lease tenants sign long-term leases with automatic rent increases over time, and the tenants pay property taxes, building insurance, and most maintenance expenses. And, most of the tenants in net-lease properties are e-commerce-resistant as well as recession-resistant by nature. As a result, net-lease real estate has the potential to generate an attractive, growing income stream, as well as long-term appreciation.

My only issue with Berkshire's investment in Store Capital is that the company is a bit on the small side. Fortunately, there are larger REITs with similar business models, such as Realty Income, which is almost four times the size of Store Capital. Berkshire purchased a 9.8% stake in Store Capital, and a similarly sized position in Realty Income would allow Berkshire to put about $1.6 billion of its cash to work.

Realty Income pays a 4.4% dividend yield, and since its 1994 IPO, has increased the payout a remarkable 92 times. What's more, the combination of income and long-term property appreciation has resulted in 16.4% annualized total returns.

Another REIT that has Buffett-like qualities

Prologis is an industrial REIT focused on logistics properties, and is one of the largest real estate investment trusts in the market. Essentially, this is a good way to invest in growing consumption, and the changes in the way consumers buy goods -- particularly e-commerce.

Since 2010, global e-commerce sales have roughly tripled, and are projected to grow at an even more rapid pace in the years ahead. In fact, in 2020, e-commerce sales are expected to top $4 trillion, as compared with less than $2.5 trillion in 2017.

Chart of e-commerce growth since 2010 and projected growth through 2020.

Image source: Prologis investor presentation.

E-commerce fulfillment requires three times the floor space of brick-and-mortar retailers. This should translate into a long-tailed growth opportunity, and with $3.7 billion in liquidity and investment-grade (A3/A-) credit ratings, Prologis has the financial flexibility to efficiently and safely capitalize on this trend.

Another reason to love Prologis is that it grows through developing new properties from the ground up, not just through acquisitions like many REITs. Development can be a big driver of shareholder value. Think of it like this: If I can buy a certain warehouse property for $10 million and collect 6% of this amount in annual rent, by building the same property for $8 million, I not only create $2 million in equity, but the rent I collect now translates to a 7.5% annual return.

This is a simplified example, but it shows how powerful development can be. In fact, Prologis estimates that it creates about $385 million annually from development starts alone, and has created $5.4 billion in value through development over the past 15 years.

The company currently has operations all over the world, and is the largest industrial REIT. Its largest tenant is Amazon (no surprise there), and other top 10 customers include Home Depot , FedEx , and Wal-Mart .

The Foolish bottom line

I'm not saying that Berkshire will actually end up buying these stocks for its portfolio, but they look attractively priced right now, and have many qualities that Buffett and his team look for when investing.

10 stocks we like better than Berkshire Hathaway (A shares)

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Berkshire Hathaway (A shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Matthew Frankel owns shares of Berkshire Hathaway (B shares), FedEx, and Realty Income. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends FedEx and Home Depot. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

PLD STOR O

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More