Warren Buffett has spent more than a half-century earning the title of world's greatest investor. Along the way, he's built up an army of people who have tried to learn at the feet of the master. And while some people simply copy his investing moves, hoping for the best, a better approach -- certainly what Buffett himself would encourage -- is to apply Buffett's investing lessons over the years to make better investing decisions of your own.
With that in mind, we asked three of our regular contributors to identify a stock that Warren Buffett devotees should consider. They gave us an interesting mix of companies, including one his Berkshire Hathaway has a stake in, WABCO Holdings Inc. (NYSE:WBC); one that Buffett himself claimed to own in the past, Seritage Growth Properties (NYSE:SRG); and one that neither he nor Berkshire owns but that has a lot of "Buffett" traits, Brookfield Infrastructure Partners, L.P. (NYSE:BIP).
Keep reading below to learn why fans of the Oracle of Omaha should pay special attention to these three stocks.
WABCO goes full throttle
Neha Chamaria (WABCO Holdings): WABCO may not be a popular name, but for Buffett devotees, the stock could offer as much potential as some of the bigger names that the legendary investor owns.
WABCO just released a strong set of second-quarter numbers, sending the markets into a tizzy -- the stock's up almost 8% as of this writing since its July 20 earnings release. WABCO manufactures products like braking, suspension, and transmission systems primarily for commercial vehicles, and it counts top heavy-duty vehicle and engine manufacturers like Daimler, Volvo, PACCAR, and Cummins among its customers. Thanks to strong demand from key markets like North America and China, WABCO's Q2 sales jumped 8.6%, and earnings surged 21% to $1.61 per share year over year.
WABCO's strong profit growth, however, is just one of the reasons why the stock jumped; the company also bumped up its full-year earnings guidance by roughly 4% at the midpoint. That may sound uninspiring until you realize that WABCO now expects its FY 2017 EPS to come in almost 47% higher over last year at the midpoint. Combine this with the fact that the company's net income and free cash flows have grown threefold in the past decade, and it's not surprising to see why Buffett likes this stock.
It's worth noting that Buffett's Berkshire Hathaway has only a tiny exposure to WABCO, but it held a 5.4% stake in the company as of March 31, 2017. From an investing standpoint, I don't see a reason why investors could go wrong owning a company that has a solid presence in its industry, boasts a strong track record of earnings, has earned double-digit returns on equity and invested capital in each of the past five years, and has strong growth potential.
Profiting from a failing company
Reuben Gregg Brewer (Seritage Growth Properties): Warren Buffett made headlines in the real estate space recently when Berkshire Hathaway announced a 9.8% stake in retail landlord Store Capital Corp. But that's not the first bet Buffett's made on property in recent years. In late 2015, he bought an 8% stake in Seritage Growth Properties. Unlike Berkshire Hathaway's Store Capital purchase, however, Buffett invested in Seritage with his own money.
Seritage is the real estate investment trust (REIT) spun off from Sears Holdings. It owns 235 properties directly, with another 31 owned via joint ventures. Roughly 85% of its square footage is leased to Sears Holdings, representing around 60% of revenue. Those numbers, if you can look past the risk of being reliant on Sears for so much of its business, show the opportunity.
Flip the math...the roughly 15% of the portfolio leased to tenants other than Sears accounts for an outsized 40% of revenue. That's because Sears is paying rent at a rate of about $4.45 per square foot, and Seritage's other tenants are paying around $13 a square foot. Newer leases are coming in at even higher rates than that.
Clearly, the opportunity that Buffett sees at Seritage is the transition away from being reliant on struggling Sears Holdings. It could be a bumpy ride since Sears' troubles appear to be escalating. But it's pretty apparent that Seritage can make a lot more money for shareholders as it steadily dumps Sears from its portfolio. If you have the fortitude to invest like Buffett does with his own money, Seritage should be on your watch list.
This infrastructure owner is oh so very Buffett
- A strong competitive moat.
- Predictable, long-term cash flows.
- Strong management with a track record of excellent capital allocation performance.
- Available to buy at a fair price.
Brookfield Infrastructure Partners, the master limited partnership sponsored and run by Brookfield Asset Management, Inc, has all four of these key aspects in spades.
To start, Brookfield Infrastructure's business is owning and operating telecom lines and systems, power transmission lines, energy pipelines and utilities, seaports, toll roads, and other critically necessary infrastructure assets. These assets all share a common trait in that they would be incredibly expensive to replicate, giving Brookfield Infrastructure a strong barrier to competitive entry.
Second, the nature of these assets is that they tend to generate very steady and reliable cash flows, across almost any economic environment. Factor in the geographic diversity of its assets and contracts structured to increase with inflation, and you can almost set your clock by the cash flows they generate.
Third, management has indeed done a steady job allocating capital to increase per-share returns. Over the past five years, the funds from operations metric is up sharply, which has allowed Brookfield to increase the dividend almost 75%:
Finally, Brookfield Infrastructure trades at a very reasonable 10.4 times trailing funds from operations and yields 4% at recent prices. With a strong track record of cash flow and dividend growth, Buffett fans would do well to consider adding Brookfield Infrastructure to their portfolios.