These seven stocks fit the Warren Buffett playbook.
The following “Warren Buffet stocks” have all the properties of great long-term investments — except the world-famous investor doesn’t own them just yet. Over his career, Buffett has curated a successful, streamlined investment thesis based on a simple adage: Buy low, hold long and sell high. Buffett focuses on business models he can easily understand and concentrates 85% of his holdings in three sectors: consumer staples, information technology and financial services. Inside these sectors, Buffett believes wide economic moats and strong brand names insulate companies from competition and generate consistent cash flows. Famously, Berkshire Hathaway Inc. (ticker: BRK.A, BRK.B) has never paid a dividend, instead reinvesting earnings. However, for stocks Buffett owns, he views dividends as a way companies reward long-term shareholders. With these themes in mind, here are seven stocks that look like perfect additions to Buffett’s stock portfolio.
Estee Lauder Cos. Inc. (EL)
Founded in 1946, Estee Lauder manufactures and sells prestige beauty products across the globe, including well-known brands such as Aveda, Clinique, Michael Kors and Tom Ford Beauty. Buffett believes powerful worldwide brands drive consistent revenues, and this large collection of prestigious names allows Estee Lauder to maintain pricing power with its customers, helping to offset increased costs for raw materials or operating expenses. What’s more, Estee Lauder has a strong track record of successful acquisitions. Earlier this year, the company increased its investment in the fast-growing DECIEM Inc. from 29% to 76% and agreed to purchase the remaining interest in three years. With cash reserves of almost $5 billion, expect Estee Lauder to continue targeting accretive acquisitions that will grow market share over the long term. In fiscal 2021, net income grew by 320% after falling 62% the year prior. Estee Lauder stock is up about 47% over the past year.
CSX Corp. (CSX)
Berkshire Hathaway acquired the 77% of the rail carrier Burlington Northern Santa Fe Corp. that it didn’t yet own for $26.3 billion in 2010. Buffett considered the deal an “all-in wager on the economic future of the United States.” CSX has more than 20,000 miles of track east of the Mississippi River, forming a stranglehold on rail networks in the eastern U.S. Inefficient ports and trucker shortages have been headwinds, but recently released third-quarter results were a home run. The company posted net earnings of $968 million and revenue of $3.29 billion, beating analyst expectations, while decreasing its operating ratio by half a percentage point. “Management’s focus on operations has resulted in improved service as well as strong margins,” writes RBC analyst Walter Spracklin. Into the future, RBC expects the rail industry’s positive fundamentals “to drive long-term growth in free cash flow.”
Campbell Soup Co. (CPB)
Campbell Soup manufactures packaged foods and over its 152-year history has developed and acquired strong brand names such as Prego, V8, Swanson and Pepperidge Farm. Buffett likes this sector, and Berkshire has a 26.6% stake in competitor Kraft Heinz Co. (KHC), although he now laments that he overpaid. For Campbell, the comedown from the pandemic-induced soup-buying bonanza has been rough. Fiscal fourth-quarter results saw net sales down 11%, and management expects earnings to fall slightly in 2022. CPB is down more than 14% in 2021 so far, but this may be the bottom. Morningstar assigns Campbell a wide economic moat rating “resulting from brand intangible assets and a cost advantage.” Morningstar gives a $48.50 fair value estimate for CPB stock, and the stock closed at $40.19 on Oct. 28, implying meaningful upside.
JPMorgan Chase and Co. (JPM)
During the pandemic, Buffett dumped many of his bank holdings, including Goldman Sachs Group Inc. (GS), JPMorgan and Wells Fargo & Co. (WFC). Today, he may be kicking himself. JPMorgan is the gold standard for bank stocks and offers a full array of services, from checking accounts to wealth management to investment banking. Morningstar has assigned JPMorgan a wide economic moat due to its sustainable cost advantages and leading positions in almost all the areas it competes, allowing it to benefit from unrivaled scale and scope within the U.S. Third-quarter results were driven by its corporate and investment banking division, notching $5.6 billion in net income on total revenue of $12.4 billion. What’s more, inside JPMorgan’s consumer and community banking division, debit and credit card sales volume was up 26% and average deposits were up 20%. In the past year, JPM stock is up about 75%.
Square Inc. (SQ)
Buffett also has a sweet spot for financial services companies such as American Express Co. (AXP) and Moody’s Corp. (MCO). Founded in 2009 by Twitter Inc. (TWTR) co-founder Jack Dorsey, Square is a payment company famous for its white square credit card readers and peer-to-peer payment system, Cash App. Like many growth-oriented technology companies, Square does not pay a dividend, instead choosing to reinvest profits in growth initiatives. In early August, Square announced it had reached a $29 billion deal to acquire Afterpay, an Australian buy-now, pay-later, or BNPL, platform. Post-acquisition, Square plans to integrate Afterpay’s platform into its credit card readers and Cash App, enabling even the smallest merchants to offer BNPL and installment payments. Square cites a total addressable market of $100 billion for sellers and $60 billion for customers and estimates that it has tapped only 2% to 3% of the market, implying high upside potential and long-term value generation.
Metlife Inc. (MET)
Buffett loves insurance companies because they generate cash at a low cost and it’s a relatively stable, defensive industry. Founded in 1868, Metlife offers insurance and financial services for individuals and institutions. Insurance companies have a business model — take in fees, invest them in appreciating assets, then pay out claims — that allows them to benefit when interest rates rise. In the second quarter of 2021, revenue from premiums and fees was $11.2 billion, up 7% from the same period in 2020, and investment income grew 29% to $5.3 billion. With COVID deaths on the decline and total employment set to rise, Metlife expects to pay out less in life insurance claims and add members to its group plan. What’s more, Metlife authorized $3 billion in share buybacks in August, implying that the company believes the market undervalues the stock.
Mohawk Industries Inc. (MHK)
Mohawk Industries manufactures flooring for residential and commercial customers. With a market capitalization above $13 billion, it’s the largest player in global flooring and maintains leading positions in carpet, tile and hardwood products. Although Mohawk posted negative revenue growth for 2020 and 2019, the past four quarters have been a reversal of that trend, and revenue grew 44% in the second fiscal quarter. In terms of operating efficiency, EBITDA — earnings before interest, taxes, depreciation and amortization — margins have improved for five consecutive quarters. JPMorgan expects “further runway for [operating] margin improvement over the next 1-2 years.” With material supply and labor availability proving headwinds, Mohawk has committed $650 million in new capital investments aimed at alleviating manufacturing constraints. Mohawk also boasts a price-earnings ratio around 13, below the industry average, and its stock price has more than doubled in the past year.
Seven “Warren Buffett stocks” to buy:
— Estee Lauder Cos. Inc. (EL)
— CSX Corp. (CSX)
— Campbell Soup Co. (CPB)
— JPMorgan Chase and Co. (JPM)
— Square Inc. (SQ)
— Metlife Inc. (MET)
— Mohawk Industries Inc. (MHK)
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