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9 Stocks That Pass the Warren Buffett Buy Test

Wayne Duggan

Stocks that fit the Warren Buffett mode.

Investors who have emulated Warren Buffett by copying the Berkshire Hathaway (ticker: BRK.A, BRK.B) portfolio have generated some impressive returns over the years. In the past 20 years, BRK.B stock has nearly tripled the return of the S&P 500 index. The only thing better than following in Buffett's footsteps is beating him to the punch. Morningstar recently compiled a list of stocks that encompass the major traits Buffett likes in an investment, including strong competitive advantages, positive free cash flow, compelling valuations and solid returns on capital. Here are nine stocks that fit the Buffett mold.

Biogen (BIIB)

Biogen is a biotechnology company that develops and produces treatments for multiple sclerosis, cancer and inflammatory diseases. Analyst Karen Anderson says Biogen's portfolio of specialty-market drugs and its pipeline focused on neurology are unique among its competitors and create the type of competitive moat that Buffett loves in a stock. Anderson is projecting $10 billion in amyloid antibody sales for Biogen by 2027, but says the stock has significant upside even if neither of its amyloid antibodies are approved by the Food and Drug Administration. Morningstar has an "undervalued" rating and $420 fair value estimate for BIIB stock.

BlackRock (BLK)

BlackRock is the largest global asset management company, controlling more than $5 trillion in assets, including its popular iShares family of exchange-traded funds. Any Buffett follower is familiar with his affinity for financial-sector stocks. Analyst Greggory Warren says money that flows into asset management firms tends not to leave, suggesting BlackRock has a competitive advantage over its peers given its leadership position. Warren says BlackRock has both active and passive offerings, a large base of institutional clients, a valuable brand and competitive fees. Morningstar has an "undervalued" rating and $500 fair value estimate for BLK stock.

Walt Disney Co. (DIS)

Disney is one of the largest diversified media companies in the world, and its recent acquisition of Twenty-First Century Fox (FOXA) and expansion into streaming video means it will be getting even bigger in the next couple of years. Analyst Neil Macker says the integration of Fox's assets and the 2019 launch of streaming service Disney+ will create value for Disney investors and eliminate uncertainty that has been weighing on the stock. Morningstar has a "fairly valued" rating and $130 fair value estimate for DIS stock.

Facebook (FB)

Facebook stock took a beating in the second half of 2018, declining more than 30 percent off its highs. However, Facebook's dominant position in the social media space as well as its robust cash flow is exactly the type of combo that Buffett loves to see. Analyst Ali Mogharabi says Facebook's unique user base of more than 8 billion customers coupled with its massive trove of user data make it an unrivaled value for online advertisers. Morningstar has an "undervalued" rating and $186 fair value estimate for FB stock.

General Dynamics Corp. (GD)

General Dynamics is a defense giant that specializes in combat vehicles and systems. Analyst Chris Higgins says the company's 2018 acquisition of CSRA has doubled General Dynamics' information technology business, making it the largest U.S. government IT contractor. Higgins says General Dynamics' Gulfstream aerospace brand has the type of wide-competitive moat that Buffett looks for in a company. Higgins says the U.S. Army will likely soon begin a long-overdue vehicle modernization program that should be a major revenue driver for General Dynamics. Morningstar has an "undervalued" rating and $216 fair value estimate for GD stock.

Altria Group (MO)

Altria Group is the parent company of cigarette giant Philip Morris. Tobacco companies have faced intense regulatory pressures in recent years, but Altria recently took large stakes in Canadian marijuana producer Cronos Group (CRON) and leading U.S. vaping company Juul Labs. Both deals demonstrate the company's willingness to adapt. Analyst Philip Gorham says the U.S. cigarette market remains relatively attractive, and Altria's 10 percent ownership stake in Anheuser Busch Inbev (BUD) creates value as well. Morningstar has an "undervalued" rating and $64 fair value estimate for MO stock.

Raytheon Co. (RTN)

Raytheon is another leading defense stock that has all the makings of a Buffett investment. According to Higgins, Raytheon's financial performance has improved dramatically after a wave of acquisitions in the late 1990s left the company extremely bloated. Segment operating margins have risen from 7 percent in 2004 to as high as 12.4 percent in 2017. Higgins says Raytheon now has the financial flexibility it needs to fully fund its operations, grow its business and return capital to its investors. Morningstar has an "undervalued" rating and $212 fair value estimate for RTN stock.

Charles Schwab Corp. (SCHW)

Schwab is a top U.S. brokerage, bank and investment services provider. Analyst Michael Wong says a combination of revenue growth and operating margin expansion should drive significant operating profit growth for Schwab in the years ahead. In fact, Wong projects operating profit will double from 2017 to 2022 as long as interest rates continue to trend higher. He says pricing pressures and market uncertainty have weighed on SCHW stock, but robust net interest income should propel Schwab higher in time. Morningstar has an "undervalued" rating and $57 fair value estimate for SCHW stock.

Wells Fargo & Co. (WFC)

Wells Fargo is the only actual Buffett holding on this list. Berkshire holds about $22.9 billion of WFC stock, making it Buffett's third largest holding. Buffett said he is unlikely to significantly add to his roughly 10 percent ownership stake due to additional regulatory requirements for ownership above that level, but analyst Eric Compton says Buffett disciples should jump on the opportunity to buy WFC stock at a discounted valuation given its attractive deposit base. Morningstar has an "undervalued" rating and $67 fair value estimate for WFC stock.

These stocks fit the Warren Buffett investing mode.

If you copy Warren Buffett's investing style, look at these nine stocks:

-- Biogen (BIIB)

-- BlackRock (BLK)

-- Walt Disney Co. (DIS)

-- Facebook (FB)

-- General Dynamics Corp. (GD)

-- Altria Group (MO)

-- Raytheon Co. (RTN)

-- Charles Schwab Corp. (SCHW)

-- Wells Fargo & Co. (WFC)

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