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* Buffett: We buy securities and bide our time
* Berkshire holdings Costco, Ingersoll may be targets
* Target should have capacity to absorb investments
* Banker: Utility like Alliant Energy could fit the bill
By Paritosh Bansal and Michael Erman
NEW YORK, Feb 28 (Reuters) - Warren Buffett has reloaded his "elephant gun," and investors have begun the hunt for the folksy billionaire's next acquisition target.
As investors try to divine the Berkshire Hathaway chairman's next mega deal, analysts and dealmakers said Buffett could look across sectors such as retail, utilities and capital goods, but may steer clear of insurance.
He could also look at companies that have the capacity to absorb capital investments from funds that Berkshire has at its disposal and earn good returns, they said.
A good place to start, they added, would be to look at his existing equity holdings.
Buffett has bought companies where he already had stakes such as railroad company Burlington Northern Santa Fe, or Wesco Financial Corp, which has insurance, furniture rental and steel businesses.
"Often businesses are priced ridiculously high against what can likely be earned from investments in stocks or bonds," Buffett wrote in his investor letter on Saturday. "At such moments, we buy securities and bide our time."
The legendary investor, who is looking to deploy a $38 billion cash pile and said his trigger finger was itchy and his elephant gun loaded for a major acquisition target, acknowledged the need for Berkshire to expand its non-insurance businesses.
Some Berkshire holdings that could be on his shopping list of possible major targets include Costco Wholesale Corp and Ingersoll Rand , experts said.
Berkshire, Costco and Ingersoll were not immediately available for comment.
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Indeed, one analyst at a major mutual fund said earlier this month his fund was already buying into Costco on the theory that Berkshire will buy the wholesale retailer.
Berkshire Vice Chairman Charlie Munger is a Costco director, so he knows the business well, the analyst said. Moreover, since Costco makes about 80 percent of its operating profit from membership fees, it analytically looks like an insurance company.
At about $32 billion market value, Costco would take nearly all the cash that Buffett has, but Berkshire could issue new shares as it did for Burlington Northern, the analyst argued.
Early last year, Buffett paid $26.5 billion for the roughly 77.5 percent of Burlington Northern he did not already own, issuing $10.6 billion of Berkshire stock to fund the deal.
"I would tend to think that Costco has a Charlie spin to it," said Thomas Russo, a partner at money manager Gardner Russo & Gardner, which is one of the 15 largest holders of Berkshire Class A shares. "Warren also talks an awful lot about Wal-Mart as his model."
Given Wal-Mart's $184 billion market cap, though, it may be more of an investment opportunity than a target, Russo said. Berkshire owns 1.1 percent of the discount retailer.
CAPITAL ABSORPTION CAPACITY
Buffett particularly values companies that can themselves absorb very large future capital investments profitably, and he is likely to look for such targets now, experts said.
Berkshire plans to invest a record $8 billion on capital spending this year, after spending $6 billion on property and equipment in 2010.
Berkshire could look for deals in utilities, where Berkshire has MidAmerican, Stifel's Shields said.
"You are seeing a lot of vertical integration there as well," Shields said. "So it could be anywhere up and down that ladder."
One investment banker who works on power deals said that most utilities wouldn't fit Buffett's criteria -- they would likely want to run an auction rather than just dealing with Berkshire.
But he said a company like Alliant Energy could fit the bill because it is located near MidAmerican Energy's service territory. It would be possible, therefore, that Alliant would be interested in dealing with that company exclusively, because the two utilities could have synergies, the banker said.
Alliant declined to comment.
Buffett has shown an interest in buying in the sector. In 2008, he backed away from a possible bidding war for Constellation Energy Group Inc .
In his investor letter on Saturday, Buffett also mentioned a string of bolt-on deals driven by a bet on housing recovery.
Russo, who has owned Berkshire stock since 1983, said no one can predict for sure where the Oracle of Omaha will strike next.
"If I knew those I would own them," Russo said. "Once he describes what the essence of the investment is, it becomes simple in hindsight. But it's never simple at the start." (Reporting by Paritosh Bansal and Michael Erman; additional reporting by Dan Wilchins; Editing by Gary Hill)