Berkshire Hathaway CEO Warren Buffett has bought many stocks during his long career. As the years have gone by, and as Buffett has become wildly successful, he's had to be increasingly selective about which stocks he buys. He can no longer buy small companies, as the amount of money he has to invest would drive the stocks up too much in the process of buying shares -- and a small investment couldn't move the needle for Berkshire, a company worth $421 billion as of this writing.
But while Warren Buffett can't buy small stocks, you can. Three of The Motley Fool's writers have suggested stocks in which our readers can invest, but for which Buffett must stand on the sidelines. Here's why they picked Clovis Oncology (NASDAQ:CLVS), Zoe's Kitchen (NYSE:ZOES), and Laredo Petroleum (NYSE:LPI).
A potential diamond in the rough
Keith Speights (Clovis Oncology): Warren Buffett and biotech stocks aren't usually mentioned in the same sentence -- for good reason. Buffett likes solid, stable companies that he can understand and that generate good cash flow. That doesn't describe most biotechs. The description doesn't apply to Clovis Oncology, but there are things that investors whose names aren't Warren Buffett should really like.
Let's first address what Buffett wouldn't like about Clovis. The company only made $7 million in revenue in the first quarter of this year. It lost over $58 million. You don't have to be a billionaire to dislike those figures.
However, it's important to understand the context for Clovis Oncology. The biotech won approval for its first drug, Rubraca, in December 2016. Rubraca was the first PARP inhibitor to gain U.S. approval for treating ovarian cancer. Some analysts project that the drug could reach peak annual sales of $1 billion for the ovarian cancer indication, and even higher revenue could come from additional indications.
Clovis is also evaluating Rubraca in a late-stage clinical study as a potential treatment for prostate cancer. Other mid-stage studies are underway exploring the potential for the drug in treating breast cancer and gastroesophageal cancer.
Even though Clovis Oncology's share price has more than tripled over the past 12 months, I think there's plenty of room for the stock to go higher if Rubraca achieves its potential. Not too long ago, I highlighted Clovis as a cancer drug stock that could make investors rich. I still think that's the case.
Too small for Buffett
Tim Green (Zoe's Kitchen): Small companies, with market capitalizations not measured in the tens of billions of dollars, are simply too small to move the needle for Buffett's portfolio. A company like Zoe's Kitchen, a chain of fast-casual restaurants valued at less than $300 million, would never make the cut.
Zoe's is going through a rough patch. The stock is way down from its all-time high reached in mid-2015, shedding 68% of its value over the past two years. Comparable sales growth turned negative in the most recent quarter, although total sales expanded, thanks to new restaurant openings. Zoe's expects the negative comparable sales trend to continue throughout the year.
Zoe's now trades at a price-to-sales ratio of roughly 1.0. Profits are minimal, but the potential for Zoe's to grow into a much larger chain is what makes the stock attractive. That sales multiple could also expand if comparable sales return to growth. Chipotle, for example, trades for more than three times sales, even after its string of food safety crises. Zoe's is unlikely to be the next Chipotle, but the stock may be priced a bit too pessimistically given its growth potential.
A small oil stock with big-time upside
Matt DiLallo (Laredo Petroleum): Permian Basin-focused oil and gas producer Laredo Petroleum isn't the type of stock that would catch Buffett's eye. With just a $3 billion market cap, it's just too small for him to consider. Furthermore, when Buffett does buy oil stocks, he primarily invests in big oil producers like ExxonMobil, though he sold his stake in that oil giant in early 2015.
That said, it's Laredo Petroleum's small size that makes it such an appealing oil stock for investors seeking outsized gains. That's because it boasts a prime position in the red-hot Permian Basin, which -- thanks to a combination of efficiency gains and innovation -- will enable the company to grow at a fast clip at current oil prices. In 2017, for example, the company expects to increase its output by 15% while living within cash flow. That's light years ahead of a company like ExxonMobil, which because of its gargantuan size can only grow output by a low-single-digit annual clip.
One of the drivers of Laredo's robust growth is the returns it can get from drilling wells in the Permian Basin. At $45 per barrel, for example, the company can earn at least a 40% rate of return on wells drilled using its data-driven Earth Model and with its latest optimized well completion technique. Because of those returns and its robust oil hedges, oil would need to be "very low for a long time" before Laredo would stop growing, according to CEO Randy Foutch.
That high-return growth has the potential to create tremendous value for investors over the long run. However, it's wealth creation that's out of the reach of Warren Buffett for the simple fact that Laredo is just too small for his portfolio to make a meaningful impact. Since that's not a problem most other investors have, they can buy Laredo and pocket the profits that have the potential to accumulate as it delivers on its high-return growth plan.