Stocks That Warren Buffett Should Buy: Warren Buffett earned his reputation as one of the most successful investors in history by delivering annual returns of approximately 20 percent per year since he took over holding company Berkshire Hathaway in 1965.
That’s significantly higher than standard market returns. By some calculations, a $1,000 investment in Berkshire Hathaway (BRK.B) in 1965 would be valued at more than $27 million now.
Compare that to investing the same $1,000 in the S&P 500 in 1965. It would be worth a mere $200,000 today.
Perhaps the most fascinating thing about Warren Buffett is that he doesn’t have a secret formula for choosing assets. He is fairly transparent about the criteria he uses to identify promising investments, and those willing to put in the time and research could – theoretically – see impressive results of their own.
Buffett relies on a value-centric strategy when making investment decisions. More importantly, he doesn’t get caught up in the excitement of startups, disruptors, and rumors of “the next big thing”.
Each purchase he makes is carefully evaluated for long-term potential, and he regularly buys and holds assets for decades.
These are the signs Buffett looks for in a company he is interested in adding to the Berkshire Hathaway portfolio:
- Consistent history of strong return on equity as compared to competitors
- Growing profit margins
- Differentiated products and services that give the company a competitive edge
- Undervalued share price as compared to larger market trends
When combined, these factors increase the odds that assets will grow in value and deliver shareholder returns. Based on those criteria, these are three stocks that Warren Buffett should buy:
Veeva Systems Is Like Salesforce For Pharma
Cloud computing had already proven itself as the future of digitization before the pandemic, but COVID-19 persuaded even the most skeptical analysts.
When the world abruptly shifted to a work-and-learn-from-home model, cloud computing provided the infrastructure necessary to ensure a seamless transition.
Most cloud computing stocks rose significantly in 2020, and Veeva Systems (VEEV) was no exception. However, Veeva has something its competitors don’t.
Veeva Systems was founded by Salesforce.com alum Peter Gassner as an end-to-end solution for pharmaceutical companies. Unlike other cloud computing providers, Veeva Systems has unique tools that cater to the needs of drug makers.
Through Veeva Vault, these companies can collect data from clinical trials, monitor compliance with FDA regulations, track sales figures, and manage customer relationships.
Veeva isn’t stopping with the popular pharmaceutical features. It is now moving into other industries that must comply with a long list of complex regulatory requirements. Examples include consumer packaged goods, chemicals, and cosmetics.
When evaluated by Warren Buffett’s standards, Veeva Systems looks like a smart buy – it’s thought to be undervalued when revenue growth and profit margins are considered. These are some of the details:
- Gross Profit Margin – 72.52 percent over the past seven years
- Selling, General & Administrative Expenses – 27.59 percent of Gross Profit Margin
- Research & Development Expenses – 19.01 percent of revenue
- Net Earning History – 27.27 percent of total revenues
- Per Share Earnings – Positive for six of the past seven years
It’s also worth noting that Veeva has taken the extraordinary step of converting to a Public Benefit Corporation effective February 1, 2021. It is the first publicly traded company to do so.
This move doesn’t impact Veeva’s for-profit status, but it does change the company’s responsibilities. As of February 1, Veeva leaders will be required to consider the best interests of customers and employees in addition to the interests of shareholders.
LuluLemon Athletica Delivered 589% Return
With so many apparel companies failing in recent years, it’s something of a shock to see one thrive. It’s even more surprising that demand for “athleisurewear” has LuluLemon Athletica checking all of Warren Buffett’s boxes.
Over the past five years, LuluLemon (LULU) has delivered 589 percent returns. This success is thought to be largely due to the company’s direct-to-consumer sales strategy.
While there are retail locations, LuluLemon cut some of the expenses traditional brick-and-mortar shops face by focusing on direct-to-consumer sales.
This figure grew by 94 percent through the third quarter of 2020, no doubt helped by the work-from-home trend.
LuluLemon’s revenues are growing, as evidenced by third quarter 2020 results. The company reported total sales of $1.1 billion, which is 22 percent higher than the same quarter in 2019.
Management announced that the 2020 holiday season was very successful. They expect the company to come in at the higher end of guidance provided for the quarter.
Until then, these are the details Buffett fans need:
- Gross Profit Margin – 55.87 percent over the past 15 years
- Selling, General & Administrative Expenses – 33.53 percent of gross profit margin
- Net Earning History – 16.22 percent of total revenues
- Per Share Earnings – Positive for 12 of the past 15 years
Autohome Has Financials To Whet Buffett’s Appetite
Autohome is a Chinese company that offers one-stop online shopping for Chinese consumers in search of their next car. Users login and gain access to detailed information on just about every vehicle make and model available, along with a database of automobiles available for sale.
The platform is especially popular, because it uses social media-style techniques to make membership more engaging.
Among other features, users can upload their own content and browse content produced by others as they determine which vehicle is best suited to their budget and lifestyle.
The platform seeks to differentiate itself from other car-related services by building out content and services that remain relevant throughout the car ownership lifecycle. For example, Autohome is working on a road trip channel that connects drivers with their favorite brands.
All of this is integrated with Virtual Reality technology, which enhances the user experience and keeps buyers coming back, even after their transaction is complete.
Of course, Autohome had a few tense moments in 2020. The biggest challenge the company faced was the novel coronavirus. It goes without saying that consumers in lock-down aren’t interested in buying a car, and when restrictions eased, it was some time before prospective car buyers had the cash necessary to make large purchases.
In addition to these issues, there have been some ups and downs in the regulatory environment that threatened delisting of some Chinese companies from US exchanges. That danger appears to have passed – at least for the moment – which gave Autohome a solid boost.
All in all, Autohome is showing the sort of value, revenue growth, and increasing profit margins that fans of Warren Buffett will find very interesting. These are the details:
- Gross Profit Margin – 88.60 percent for the past 10 years
- Selling, General & Administrative Expenses – 40.51 percent of gross profit margin
- Research & Development Expenses – 15.33 percent of revenue
- Net Earning History – 38 percent of total revenues
- Per Share Earnings – Positive 9 of the past 10 years
Investing Like Warren Buffett: The Bottom Line
The bottom line is that you can build your own Warren Buffett-style portfolio by paying attention to a set of details that many investors overlook.
Skip the stocks that have suddenly increased in value because they got a bit of positive news coverage. Instead, focus on solid companies that have a reliable history of revenue growth and profitability.
Most importantly, choose businesses that have a competitive edge through differentiated products and services.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.