Aug. 12, 2002 12 AM PT

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BLOOMBERG NEWS

OMAHA  &mdash   Warren Buffett&rsquo s Berkshire Hathaway Inc. is on a $20-billion buying spree that some investors say has only just begun.
So far this year, Buffett has joined with Lehman Bros. Holdings to provide $2 billion in financing to energy concern Williams Cos., invested $100 million in telecommunications specialist Level 3 Communications Inc. and bought two gas pipelines--one from Williams for $450 million and one from Dynegy Inc. for $1.88 billion in cash and debt.
After spending $4.24 billion this year and more than $15.4 billion over the last two years, Buffett still has as much as $40 billion in cash and short-term investments available for acquisitions. He said in his annual letter to shareholders in March that he wants to make acquisitions in the $5-billion-to-$20-billion range.
&ldquo Absent a major catastrophe, this should be Berkshire&rsquo s best year ever,&rdquo said Keith Trauner, an analyst at Fairholme Capital Management, which manages $33 million and owns Berkshire shares.
The stock market rout has created investment opportunities for Berkshire and also is helping the company&rsquo s insurance businesses maintain price increases instituted since the Sept. 11 terrorist attacks, which cost Berkshire $2.28 billion and the insurance industry about $58 billion. Berkshire&rsquo s second-quarter earnings excluding investment gains or losses probably rose to $550 a share from $231 a year ago, according to a survey of analysts by Thomson First Call. The company is expected to report earnings after the market closes today.
&ldquo He&rsquo s buying great assets from companies whose holding companies are in distress,&rdquo said Fairholme&rsquo s Trauner. Kern River, the pipeline Buffett&rsquo s MidAmerican Energy unit bought from Williams, &ldquo is a great asset,&rdquo Trauner said, considering how much it would cost in time and money to lay a new pipeline.
Buffett, in his letter to investors, decried what he said was a lack of investment opportunities, saying Berkshire&rsquo s size as well as market conditions such as outsized valuations make it impossible to replicate the company&rsquo s past successes. &ldquo Two conditions at Berkshire are far different from what they once were: Then we could often buy businesses and securities at much lower valuations than now prevail and more important, we were working with far less money than we now have,&rdquo he said.
The Oracle of Omaha also said he needed to find &ldquo elephants,&rdquo or large undervalued companies, to make significant gains.
&ldquo You could see him buying some elephants,&rdquo said Greg Lapin, an analyst at Citigroup Asset Management, which manages $409 billion and owns Berkshire shares.
Buffett missed an opportunity a few years ago to buy pharmaceutical stocks before they rallied, Lapin said. &ldquo He didn&rsquo t take advantage then but he might be interested in a basket of pharmaceutical stocks today,&rdquo he said.
Times have changed since the March 9 letter, investors say. The Standard & Poor&rsquo s 500 index has lost more than 26% and the Dow Jones industrial average has lost 22%.
Shares of Berkshire have lost more than 6% this year and rose $110 to $71,000 in trading on the New York Stock Exchange. They&rsquo ve outperformed the S& P 500 by 22% since March 9.
&ldquo This is the ideal market for Warren Buffett,&rdquo said Guy Spier, a money manager at Aquamarine Fund, which has 27% of its $30 million in Berkshire stock. &ldquo With the Dow cheaper, opportunities are likely to be better. If the Dow were down to 10 times earnings, he would be in even better shape.&rdquo
Buffett, who turns 72 this month, declined a request for an interview on possible acquisition targets. At his company&rsquo s 2001 annual meeting, he said asbestos litigation is a &ldquo cancer&rdquo that will keep stifling U.S. businesses. He also said Berkshire may buy companies forced into bankruptcy.
&ldquo He&rsquo s looking for things that are out of favor,&rdquo said Bill Batcheller, a money manager at National City Corp., which manages $70 billion and owns Berkshire shares.
Among the out-of-favor industries Buffett might be targeting are the asbestos, energy, insurance and pharmaceutical industries, investors said.
&ldquo Two years ago most people thought Buffett lost his touch,&rdquo Trauner said. &ldquo Sound balance sheets never go out of style. They can go out of favor but never out of style.&rdquo