With investments totaling nearly $157 billion at the end of 2016, including just under $120 billion in stocks, Warren Buffett's Berkshire Hathaway boasts an enviable portfolio that rivals the size of many of the world's largest companies. But with that size comes less flexibility.
Buffett once elaborated:
Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money.
More specifically, Buffett can no longer consider investing in small companies -- unless he opts to acquire them altogether, of course -- as their potential share-price appreciation would only have a small impact on Berkshire's overall returns.
To that end, we asked three top Motley Fool contributors to each find a promising stock that Warren Buffett can't buy for this reason, but you can. Read on to see why they chose iRobot (NASDAQ:IRBT), Axon (NASDAQ:AAXN), and FactSet Research (NYSE:FDS).
Home robotics are only just getting started
Steve Symington (iRobot): With a market capitalization that's still under $2 billion, iRobot almost certainly flies below Warren Buffett's investing radar. But that shouldn't stop you from considering the robot maker known primarily for its popular Roomba robotic vacuums.
As it stands, Roomba still drives the vast majority of iRobot's revenue. But that's not a bad thing considering management has previously suggested that Roomba's market penetration at this stage of its life cycle -- roughly 10 to 15 years following introduction -- is roughly the same as that of other disruptive household appliances like the microwave oven and dishwasher.
iRobot has also enjoyed an overwhelmingly positive response to its newer Braava jet floor-mopping robot, which promptly became its No.1-selling SKU in Japan after it was introduced in Asia in the third quarter last year. All told, wet floor-care products comprised 15% and 50% of revenue in Japan and China, respectively, last quarter. And revenue from the Braava and Braava jet models climbed 75% year over year in 2016.
iRobot is also in the early stages of developing a differentiated robotic lawn mower, which will mark its entry into another multibillion-dollar market in the coming years. Finally, iRobot's recent app improvements and impending integration of Amazon's Alexa voice control show the company is working to position itself at the center of the fast-growing trend of connected homes.
Perhaps iRobot will be on Buffett's radar once these trends propel the size of its business to new heights. But I would much rather buy now and enjoy iRobot's returns before that happens.
Investing in the future of law enforcement
Brian Stoffel (Axon): Back in 1999, Warren Buffet quipped that, if he only had $1 million to manage, he could return 50% per year. Whether or not that's true is up for debate, but it underscores the fact that he simply cannot focus on big opportunities in small-cap stocks. Given that Berkshire Hathaway now has a market cap of over $400 billion, such investments simply don't move the needle like they used to.
But for us mere mortals, opportunities abound in small- and medium-cap stocks. Case in point today: Axon Enterprise. Most people recognize the company because of its eponymous stun guns. But that's not where my interest lies. Instead, it's on the company's foray into police body cameras, and more specifically, its Evidence.com platform for storing and saving said film.
Here's how sales of the company's Axon cameras and subscriptions to Evidence.com have grown over the years.
It's Evidence.com that's the deal-breaker. There's nothing specific that makes Axon body cameras any better over the long run than the competition's. But if all of your data is stored on one cloud platform -- and that cloud platform offers unmatched AI capabilities for coding and searching film -- you'd be loath to switch.
Trading with a market cap of just $1.2 billion, this company is definitely too small for Warren Buffet to buy. And with a P/E of over 70, this might not fit Buffett's style either. But with a powerful moat provided by Evidence.com, I think investors should take a look at this small-cap stock.
Get intelligent with your finances
Dan Caplinger (FactSet Research Systems): Warren Buffett typically doesn't pay much attention to small- or mid-sized companies, because they aren't large enough to move the needle in his already impressive portfolio. But that means he would miss out on FactSet Research Systems, a financial services company with a market capitalization of around $6 billion that has produced impressive growth lately.
FactSet offers subscription information services to financial professionals, including a full range of market research and capabilities for helping financial companies manage their clients' needs. The company has done a great job of bringing on new customers lately, taking full advantage of bull-market conditions to boost its user counts. Retention rates are high, making it clear that once customers join FactSet, they're reluctant to give up the services that it offers to them.
Favorable conditions in the financial industry have played a key role in FactSet's success, but the company also prides itself on continual innovation that delivers what its customers want. For serious investment professionals who want to offer their clients the latest and best information possible, FactSet has become a must-have tool, and the resulting demand has boosted the stock significantly. That has the potential to produce impressive future gains for FactSet shareholders -- even if the company is too small to hit Buffett's radar.