Warren Buffett is the equivalent of a rock star in the investment world. And like the most successful rock stars, Buffett has legions of fans.
We asked three of The Motley Fool's contributors to pick a stock that Warren Buffett fans would like. They suggested three that the Oracle of Omaha himself likes: Costco Wholesale (NASDAQ:COST), The Kraft Heinz Company (NASDAQ:KHC), and Phillips 66 (NYSE:PSX). Here's why you'll probably like these stocks as much as he does.
A wonderful company
Tim Green (Costco): Warehouse club Costco is unquestionably one of the best retailers in operation today. The company boasts 88 million members, with renewal rates consistently around 90%. Those members are willing to shell out $60 to $120 each year for access to Costco's prices, which are often far below those of competing retailers. The company accomplishes this by being extremely efficient, selling in bulk, and limiting the number of items available.
It's no surprise that Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) owns a considerable stake in Costco. Berkshire owned about $775 million worth of the company as of March 31, about 1% of all outstanding shares. Costco's margins are slim, but it makes up for it with sheer volume. Gross margin is typically below 15%, but the company manages to squeeze out a 3% operating margin. Costco spends just 10% of revenue on operating expenses, compared to 21% for Wal-Mart.
Buffett bought Costco shares way back in 2001 at a far lower price, so Buffett fans shouldn't jump into the stock simply because Berkshire owns it. Costco stock is not cheap, trading for nearly 34 times earnings. That's a multiple that will be tough to justify given the slow-growth nature of the warehouse club. At a lower price, most investors should be thrilled to add Costco to their portfolios. But today's price looks too high.
A tasty treat for investors
Keith Speights (The Kraft Heinz Company): If you're a Warren Buffett fan, you'll probably also be a fan of what he likes. And Warren Buffett must really like Kraft Heinz. It's the biggest holding in Berkshire Hathaway's portfolio. Berkshire owns more than one-quarter of the giant food company.
But why does Buffett like Kraft Heinz? For one thing, the company spins off a nice cash flow -- $3.4 billion in free cash flow over the last 12 months. Of course, that cash flow is made possible by solid earnings. Kraft Heinz reported net income of $3.6 billion last year on revenue of $26.5 billion.
Another plus for Kraft Heinz is its willingness and ability to make good deals that reward shareholders -- something that Buffett is known for doing himself. In July 2015, Kraft merged with Heinz to create the megacompany that exists today. The stock has handily outperformed the S&P 500 index since then. Although Kraft Heinz's attempted acquisition of Unilever died on the vine, the company seems likely to make another deal. Colgate-Palmolive has been rumored to be a potential acquisition target.
Last but not least, there's the dividend. Kraft Heinz dividend currently yields 2.57%. Although investors probably shouldn't expect huge increases, they should be able to count on reliable dividends between 2.5% and 3%.
The steady value creator
Matt DiLallo (Phillips 66): Refining, midstream, and chemicals giant Phillips 66 is one of Buffett's 10 largest holdings. Overall, he has invested more than $6.4 billion into the company, which amounts to roughly 15% of its outstanding shares. The reason Buffett has invested so much capital into Phillips 66 is that it has done an excellent job of creating value for investors since gaining its independence five years ago, delivering total returns of more than 175% versus 93% for the broader market.
One of the fuels of that outperformance is the company's knack for allocating capital toward high-return growth projects that are taking advantage of the low-cost oil and gas supplies coming from the shale boom. These investments have included quick payout projects at its refineries to improve margins and large-scale growth projects in its midstream and chemicals segments that will benefit from cheap gas supplies.
In addition to allocating capital toward growth projects, Phillips 66 has also done an excellent job of returning capital to investors through a growing dividend and steady share repurchases. In fact, the company has returned more than $14 billion in cash to investors over the past five years, which have meaningfully reduced its share count while providing investors with a rapidly growing income stream since it has increased the dividend seven times and by a 30% compound annual rate.
Phillips 66's future looks bright since it has several promising growth projects nearing completion that should increase future cash flows. That money gives the company the tools to continue creating value for investors, which makes it such a great stock for Warren Buffett fans to consider owning for the long haul.
Keith Speights owns shares of The Kraft Heinz Company. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Costco Wholesale. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.