When it comes to identifying companies that have bright prospects and trade at discounts relative to their long-term potential, few investors can claim a better track record than Warren Buffett. His expertise has helped investment conglomerate Berkshire Hathaway crush the market over the past half-century, and this incredible performance has naturally attracted attention -- with investors aiming to replicate the Oracle of Omaha's moves and apply his investing criteria and strategies to stocks the market is underappreciating.
To help readers focus on stocks that are worth owning for those looking to invest in the Buffett mold, we put together a panel of Motley Fool contributors and tasked each member with profiling a stock that's worthwhile for followers of the Oracle of Omaha. Read on to see why they identified Walt Disney (NYSE: DIS), Home Depot (NYSE: HD), and Apple (NASDAQ: AAPL) as Buffett stocks that are worth buying today.
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Just try watching a movie without paying Disney. I dare you.
Rich Smith (Walt Disney): What is it that makes a stock a "Warren Buffett stock?" Once again, here's a quote from Roger Lowenstein's Buffett: The Making of an American Capitalist, to set the scene and remind us:
As they rocked on the Russells' front-porch glider in the stillness of the Midwestern twilight, the parade of Nashes and Studebakers and the clanging of the trolley car would put a thought in Warren's mind. ... "All that traffic," he would say to her. "What a shame you aren't making money from the people going by." As if the Russells could set up a tollbooth on North 52nd Street. "What a shame, Mrs. Russell."
To Buffett's mind, the ideal stock to own is like a tollbooth you must pay to do the things you want. With every passing year, and each new media acquisition, that looks more and more like Disney to me.
Want to watch a Disney movie? Pay Disney. Marvel? Disney. Want to watch Star Wars, Pixar, or ... even a sporting event? Disney, Disney, Disney.
Pretty soon, you'll also probably be paying Disney to watch movies on its dedicated streaming channel, Disney+, and to stream sports on ESPN+. Even if you try to find your way out of the Disney-sphere, by subscribing to Netflix or Hulu, for example -- well, Netflix might work, but Disney will soon own 60% of Hulu.
Seems to me a Disney stock that's selling for a mere 13 times trailing earnings today is a pretty cheap price to pay to own a tollbooth on entertainment like this one.
Improve your portfolio
Demitri Kalogeropoulos (Home Depot): To my knowledge, Buffett hasn't ever owned Home Depot stock, even though its large market capitalization makes it one of those rare companies that could make a difference in his massive portfolio. The home-improvement retailer has several characteristics that the famous investor favors when hunting for stocks.
Its pricing power, for one, is evident in its market-thumping gross profit margin. The chain aims for what management calls "product authority" rather than just low prices, and this approach helped it earn close to 15% operating margin over the past year. Its customer loyalty also looks rock solid when you consider how it routinely trounces rival Lowe's (NYSE: LOW) in sales growth. Finally, Home Depot's 42% return on invested capital, a favorite Buffett metric, is far higher than that of Lowe's and among the best on the entire market.
Lately, investors have soured a bit on Home Depot's stock thanks to short-term worries that an economic slowdown might hurt the housing market. Shares haven't fallen nearly far enough for the retailer to qualify as a value investment. However, this high-performing business has become cheaper, and that's a situation that long-term investors can take advantage of by holding the stock through the inevitable cyclical ups and downs in its industry.
Apple still looks appealing
Keith Noonan (Apple): Buffett started buying Apple in 2016 and continued to push into the company, to the point that it's now Berkshire Hathaway's largest investment holding by weight. Buying Apple earned the Oracle of Omaha plenty of early plaudits, particularly as the company climbed to reach a valuation of over $1 trillion in August, but slipping iPhone sales have since prompted the market to take a more cautious outlook. While slowdown for the handset business presents a meaningful threat and is something investors should keep an eye on, Apple remains a Buffett stock worth buying.
Shares are still down roughly 30% from their high, even after a recent pop on the heels of the company's first-quarter earnings results. iPhone sales fell roughly 15% in the December-ending quarter, owing largely to slowdown in the Chinese market, but revenue for the services segment climbed 19% from the prior-year period. That's the big dynamic investors are looking at -- whether the company can successfully pivot to a more software-oriented business amid softening demand for its handsets. Even though Apple now generates roughly $40 billion annually from its services segment, that could look like a tall order depending on your time horizon. However, some investors and analysts may have become overly pessimistic about the hardware side of things and the amount of time Apple has to orchestrate this transition.
Apple's handset sales have been impressively resilient even though the progression of the iPhone's design and features has been decidedly more iterative than revolutionary. 5G compatibility, increased augmented-reality functionality, and significant battery performance improvements are just some of the more substantive additions that on the horizon that could be significant positive catalysts. There's also long-term potential in the company's wearables, home, and accessories segment -- which saw a 33% year-over-year sales increase last quarter and could still just be scratching the surface of those markets.
With the company's forward price-to-earnings ratio depressed to roughly 13.5 and its dividend yield elevated to 1.9% and more substantial payout growth likely on the way, the strength of Apple's combined hardware and software ecosystem is still worth investing in.
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Demitrios Kalogeropoulos owns shares of Apple, Berkshire Hathaway (B shares), Home Depot, Netflix, and Walt Disney. Keith Noonan owns shares of Walt Disney. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short February 2019 $185 calls on Home Depot, and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.