Warren Buffett's Berkshire Hathaway (NYSE:BRK-B)(NYSE:BRK-A) manages so much money that he has to invest billions of dollars in an investment for it to move the needle for him, and that makes it hard for him to buy small-cap stocks. Also, because Berkshire Hathaway owns many companies outright, his ability to invest in companies that compete with his existing businesses is hamstrung.
These limitations mean Buffett may miss out on some investing opportunities that you don't have to. For instance, Alarm.com (NASDAQ:ALRM), Progressive (NYSE:PGR), and Papa John's (NASDAQ:PZZA)are three companies he can't buy that you can, according to three Motley Fool investors.
An upstart that's shaking up a big industry
Todd Campbell (Alarm.com): For decades, alarm companies have been racking up billions of dollars in recurring revenue from homeowners and small-business owners. The sleepy industry, however, is being upended by Alarm.com, a fast-growing upstart that's using technology to win away market share.
Alarm.com provides customers with solutions that allow them to monitor and control their homes and office spaces via the Internet. The company's service is designed from the ground up to be operable with various technology-enabled consumer devices, appliances, and products, and that makes it a great back-door play on the Internet of Things.
Its client base includes 5 million households, up from 1 million households in 2012, and these customers use Alarm.com to manage video cameras, doorbell cameras, smart thermostats, and automatic door locks. As buildings get increasingly more intelligent, Alarm.com will be able to sell increasingly more complex services, providing significant long-term sales and profit growth.
The company's business model is already paying off for investors. In Q2, sales jumped 33% year over year to $86 million and GAAP net income surged to $9.9 million from $1.9 million. Non-GAAP EPS clocked in at $0.33 in the quarter, up from $0.15 in the same period last year. This year, management's forecasting sales of between $326.3 million and $327.8 million, and EPS of at least $0.96.
Granted, Alarm.com's shares aren't as inexpensive as some might like, but fast growth will help keep valuation in check, and since management estimates only 5% of the planet's homes are smart homes so far, there's a lot of running room ahead that could make this company a winning investment.
A Buffett competitor with the power of Flo
Dan Caplinger (Progressive): Buffett already has his huge Geico auto-insurance business under the Berkshire corporate umbrella, and so there's little chance that antitrust regulators would ever allow him to think about buying Progressive. However, that doesn't mean he wouldn't be interested in the company. Progressive has done a good job of competing against Geico, with marketing campaigns that have attracted attention and helped build up a solid customer base. The insurer boasts more than 11 million personal auto policies, up by more than 820,000 over the past year, and Progressive has consistently been able to make that business profitable, boosting net income by nearly half from year-ago levels in its most recent results.
Where Progressive would benefit from being part of the Buffett empire is in its internal capital allocation. Because of its emphasis on auto insurance, Progressive tends to invest most of its capital in short-term securities that earn relatively little income. Buffett instead generally uses higher-return investments to take greater advantage of the float between receiving premium payments and paying out claims. Even with its independent status, though, Progressive has been able to produce impressive share-price gains for long-term investors, and its prospects continue to look bright as it seeks to gain even greater market share in the insurance industry.
Order a slice of growth
Demitri Kalogeropoulos (Papa John's): Buffett has a soft spot for businesses that own well-recognized brands that help them perform well even in a crowded consumer marketplace. He also prefers companies that have amassed a large base of customers who demonstrate their loyalty through repeat purchases. That's why the billionaire investor might find Papa John's an attractive investment today if not for its relatively small market capitalization.
The pizza-delivery specialist runs an extremely light business model. Since most of its locations don't offer dine-in space, very little capital is required to launch a new shop. Papa John's leans heavily on franchisees to operate stores, too, which results in a steady flow of high-margin royalty fees. Those advantages have helped it quickly expand to 5,100 locations around the world, including 4,300 just in the United States.
And while investors have worried for years about competitive challenges and a saturated marketplace for pizza, Papa John's sees its operations just continuing to churn higher. In fact, it recently posted its 27th straight quarter of comparable-store sales growth in the mature U.S. segment.
Management is so bullish about the delivery business that it's taking on new debt to fund a massive stock-buyback program. Papa John's plans to spend $500 million over the next 18 months to dramatically reduce its share count, and so investors will want to keep an eye on its rising leverage. If executives are smart about using the businesses' strong cash flow to quickly pay down its liabilities, the move could pay big dividends to shareholders over the long term.
Dan Caplinger owns shares of Berkshire Hathaway (B shares). Demitrios Kalogeropoulos owns shares of Berkshire Hathaway (B shares). Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Alarm.com Holdings. The Motley Fool has a disclosure policy.