Prediction: This American Industrial Giant Could Be Warren Buffett's New Secret Stock

Warren Buffett has been one of the most closely followed investment personalities on Wall Street for nearly 60 years. With compound annual returns nearly twice as good as the S&P 500 (SNPINDEX: ^GSPC), it's no wonder why Buffett has earned the moniker the "Oracle of Omaha."

What I find fascinating about Buffett is that when he is asked questions about his strategies or economic outlooks, his answers are almost always incredibly simple. He doesn't use fancy finance jargon, nor does he act like he knows something the rest of the world doesn't. Buffett sticks to the basics, and it works.

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With that said, one mysterious attribute of Buffett's investment choices is that from time to time, his firm, Berkshire Hathaway, chooses to keep new positions hidden until required by securities regulations to be revealed. For reference, if Berkshire owns 5% or more of the outstanding shares of a business that it is invested, then they would have to make this public knowledge. It's likely that Berkshire prefers to keep these positions hidden so that it doesn't lead to pronounced trading around one of its new core businesses.

Per Berkshire's most recent 13F filing, Buffett and his team appear to be building a position in a new secret stock. While it's anyone's guess as to what company could be Buffett's newest darling, it's entertaining to speculate what the Oracle might be buying next.

Let's explore the types of businesses that Buffett has a knack for. From there, I'll analyze some recent trading activity out of Berkshire to help narrow down what industry Buffett may be eyeing right now. Lastly, I'll take a guess at which stock I think Berkshire may be building a position in.

What types of companies does Warren Buffett like to invest in?

Buffett's investment philosophy isn't inclusive of fancy swing trading strategies or quantitative analysis around the derivatives market. Rather, Berkshire has a relentless focus on value investing. In other words, Buffett doesn't chase momentum or volatile growth stocks.

In addition, Berkshire's portfolio boasts a number of America's most iconic brands, including Coca-Cola, Apple, Bank of America, Visa, Chevron, Occidental Petroleum, Domino's Pizza, and American Express.

Not only have each of these companies built brand moats at global scale, but each generates enormous amounts of cash flow that can be passed on to investors in the form of dividends or share buybacks -- two other cornerstones of Buffett's investment criteria.

Image source: Getty Images.

Parsing Buffett's breadcrumbs

Given these details, it's clear that Buffett has a preference for consumer brands, energy, and financial services. With that in mind, let's see if Buffett has dropped any subtle breadcrumbs as to which industry his new secret stock might be in.

In Berkshire's first-quarter earnings report, the firm categorizes its portfolio as follows:

Data source: Berkshire Hathaway 10Q.

This data doesn't tell investors too much about Buffett's secret stock. All that can be determined from these figures is that Berkshire has been trimming positions in the financial services industry while adding to consumer products and the industrial sectors.

Complementing this analysis with Berkshire's most recent 13F can help narrow down the options, though.

During the first quarter, Berkshire sold 48,660,056 shares of Bank of America -- reducing its exposure by 7%. In addition, the firm also sold 4% of its position in Capital One and completely exited two bank stocks: Citigroup and Nu Holdings.

In addition, Berkshire added to Domino's Pizza and Constellation Brands during the first quarter -- hence, the consumer products category rose by $1.2 billion.

Given these details, I'm confident that Buffett's secret stock is in the commercial, industrial, and other category.

What company do I think is Warren Buffett's secret stock?

To help further support my hypothesis, consider that many of Berkshire's purchases during the first quarter were concentrated in stocks such as Pool Corp, HEICO, and Occidental Petroleum. While I do not know for certain how much capital Berkshire deployed into its new position, I can make a reasonable estimate.

These financials indicate that Berkshire spent about $2 billion in the commercial, industrial, and other portion of its portfolio. Based on the amount of shares purchased and the average share prices during the quarter for Pool Corp, HEICO, and Occidental Petroleum, I am assuming Berkshire invested approximately $358 million across these stocks. If I subtract that total from the aggregate $2 billion in the table, it would look like roughly $1.6 billion was allocated toward the secret stock.

Since Buffett would have to reveal the stock if Berkshire owned 5% or more of the company, an initial investment of $1.6 billion likely means that Berkshire's new business is valued in the tens of billions (at a minimum).

The company I think that may have earned a spot in Berkshire's portfolio is Caterpillar (NYSE: CAT).

With a market capitalization of $161 billion, a $1.6 billion initial investment would imply a small position for Berkshire's portfolio.

Caterpillar is an iconic American industrials business, the stock boasts a modest 1.6% dividend yield, and the company has consistently repurchased shares in recent years.

CAT PE Ratio (Forward) data by YCharts

While the company is trading at a historical premium on a forward price-to-earnings (P/E) basis, there has been some notable valuation compression as of late -- thanks in large part to uncertainty around new tariff policies.

Nevertheless, despite some near-term macroeconomic headwinds, it appears that investing in American infrastructure -- particularly in the artificial intelligence (AI) arena -- is on the rise from both foreign and domestic partners. I think Caterpillar is positioned to benefit greatly from this ongoing AI-related and other infrastructure investment in the U.S. for years to come -- hence, buying the dip right now might be a savvy move.

While the ideas explored throughout this article may help shed some light into how a billionaire such as Buffett built his fortune, it is important to understand that I am merely speculating on Berkshire's secret stock. While I do think it is an industrials business, my guess is as good as anyone else's. Only time will tell what business has caught Buffett's eye and earned a spot in his prestigious portfolio.

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American Express is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Adam Spatacco has positions in Apple. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Chevron, Domino's Pizza, and Visa. The Motley Fool recommends Capital One Financial, Constellation Brands, Heico, Nu Holdings, and Occidental Petroleum. The Motley Fool has a disclosure policy.