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3 Candidates for Warren Buffett's Portfolio: Starbucks, Colgate-Palmolive, and Tiffany

Warren Buffett is always looking for high-quality companies to add to his outstanding collection of remarkably solid businesses. With their own distinctive characteristics, companies such as Starbucks (NASDAQ: SBUX  ) , Colgate-Palmolive (NYSE: CL  ) , and Tiffany (NYSE: TIF  ) have many of the traits that Buffett appreciates when selecting investments, and this says a lot about these companies and their long-term potential.

Caffeinated opportunities with Starbucks
Warren Buffett puts a lot of attention on a company's management team, and Howard Schultz is second to none in his industry. The founder and CEO of Starbucks practically invented specialized coffee as a popular product category, and he has led Starbucks from a small group of coffee stores in Seattle to a global empire with more than 20,500 stores in 64 countries and growing at full speed.

Source: Starbucks.

Demand remains remarkably strong, and the company has abundant potential for growth in the years ahead. Even in the U.S., where Starbucks has reached a significant level of market penetration, same-store sales increased by 6% during the quarter ended on March 30, a very encouraging sign when it comes to evaluating demand strength in main markets.

Starbucks has a lot of room for store base expansion in emerging markets, and menu innovations represent another important growth venue for the company over the coming years.

Starbucks is leveraging recent acquisitions, such as Evolution Fresh, La Boulange, and Teavana, to broaden its portfolio of food and drinks offerings. This should allow for increased revenues in a cost-efficient manner, as menu innovations make it possible to grow sales while keeping fixed costs at stable levels.

Colgate-Palmolive's rock-solid cash flows
Warren Buffett tends to like market leaders in stable and dependable industries, especially when they generate tons of cash flow on a recurring basis. Keeping this in mind, it looks like Colgate-Palmolive has what it takes to make Buffett smile.

Source: Colgate-Palmolive.

Colgate-Palmolive is well-known for its undisputed market leadership in the oral care industry on a global scale. According to management, the company owns a market share of 44.3% in toothpaste, 33.5% in toothbrushes, and 38.5% in mouthwashes around the world.

Colgate sells its products in 225 countries and makes more than 80% of its revenue outside the U.S., which provides geographic diversification and international growth opportunities to investors.

The company has built solid relationships with dental care professionals around the world, and this is a big advantage when it comes to creating brand awareness and product differentiation.

Source: Colgate-Palmolive.

Colgate-Palmolive's financial strength is beyond question, and the company has consistently rewarded shareholders with growing dividends over the long term. Colgate-Palmolive has paid uninterrupted dividends since 1895, and it has raised those distributions for 51 years in a row.

Tiffany shines around the world
Warren Buffett is all about competitive strengths, and Tiffany is unquestionably an extraordinary player in the jewelry and accessories business. Brand differentiation, exclusive designs, and high-quality retail locations allow Tiffany to demand a considerable pricing premium for the products inside the famous blue box, and this means superior profitability for investors.

Unlike Colgate-Palmolive, Tiffany operates in a cyclical industry that is tied to discretionary spending, so the company does not offer the same degree of stability when it comes to performance during harsh economic times. But Tiffany's fundamental qualities and affluent customer base have allowed the company to successfully navigate through good and bad economic times over the long term.

Source: Tiffany.

Besides, the business is clearly firing on all cylinders, and demand is particularly strong in the Asia-Pacific region, indicating that Tiffany benefits from exciting growth prospects in emerging markets.

Sales during the quarter ended on April 30 increased 13% versus the same period in the prior year on the back of an 11% increase in comparable-store sales. Strong product pricing and cost discipline allowed Tiffany to generate increasing profit margins during the quarter, so earnings per share jumped by a remarkable 49% annually, to $0.97 per share from $0.65 per share.

Sales in the Asia-Pacific region were especially encouraging, growing by 17% to $261 million; sales adjusted for currency fluctuations increased by an even stronger 19% in the region, and comparable-store sales grew 10% versus the same quarter in the prior year.

Extraordinary brand power, outstanding financial performance, and exciting demand in emerging markets bode remarkably well for investors in Tiffany over the years ahead.

Foolish takeaway
Starbucks, Colgate-Palmolive, and Tiffany are three very different companies operating in their own industries and with their own weaknesses and strengths. But the three companies have important things in common, like indisputable fundamental quality and rock-solid competitive advantages. These are the kinds of companies Warren Buffett might consider adding to his investment holding, so maybe they deserve a place in your portfolio, too.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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Related Tickers

9/1/2015 4:00 PM
CL $61.27 Down -1.54 -2.45%
Colgate-Palmolive CAPS Rating: ****
SBUX $53.50 Down -1.21 -2.21%
Starbucks CAPS Rating: ****
TIF $79.94 Down -2.31 -2.81%
Tiffany & Co. CAPS Rating: ***