Warren Buffett has no shortage of acolytes, and it's easy to see why.
The Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) chief and founder has made thousands of early investors in his conglomerate rich as the parent of businesses like GEICO car insurance and Burlington Northern Santa Fe railroad has posted average annual returns of 20% over the last 50 years, crushing the market. Buffett has never gotten too big for his britches, though. He still lives in a modest house in his hometown of Omaha, and he's full of homespun wisdom that even the most novice investor can absorb. Buffett has made a mint out of value investing and finding companies with sustainable competitive advantages, or economic moats, as he calls them.
In that vein, we have three picks from fool.com contributors for Buffett fans. Keep reading to see why they think Johnson & Johnson (NYSE:JNJ), Southwest Airlines (NYSE:LUV), and General Motors (NYSE:GM) would be great choices for Buffett-style investors today.
The crown jewel of healthcare
George Budwell (Johnson & Johnson): Warren Buffett isn't exactly a fan of volatile healthcare stocks. In fact, Berkshire Hathaway only holds four healthcare stocks in its entire portfolio at the moment -- DaVita Inc., Johnson & Johnson, Sanofi, and Teva Pharmaceutical Industries Ltd.
The main reasons for Buffett's diffidence toward healthcare as an investing vehicle are the sector's intense levels of competition, rapid pace of innovation, as well as its heavy dependence on political trends that seem to change nearly every election cycle. In short, the sector's profitability is hard to predict over the long term, which generally isn't a very attractive feature for a classic fundamentals-based investor like Buffett.
Healthcare giant J&J, though, has been among the few companies operating in the sector that has consistently overcome these three key headwinds -- leading to market-beating gains for its shareholders over the last 30-plus years. The company's magic, if you will, has been its industry-leading pharmaceutical pipeline that has quickly replaced drugs either going off patent or that are losing their competitive edge in the marketplace. The net result is that J&J's top line and free cash flows have both continued to churn ever higher, despite severe downturns for former star products like Olysio and Remicade, among many others.
In turn, J&J has been able to steadily increase its top-notch dividend program for an awe-inspiring 56 consecutive years. That's a particularly rare feat for a healthcare company -- underscoring why Buffett has felt comfortable owning this stock for almost 13 straight years at this point. Buffett fans, therefore, may want to take a deeper look at this shining gem of the healthcare sector.
An airline Buffett has come to love
Keith Noonan (Southwest Airlines): Buffett hasn't always been a fan of airline stocks, stating in 2013 that they were "a death trap for investors," but Berkshire has been loading up on them in recent years as margins have improved. As of June 30, Berkshire owned 56.5 million Southwest shares -- a roughly 10% stake in the airline that's worth about $3.2 billion at today's prices.
The airline fits the Buffett criteria of having a strong management team and a well-liked brand, with the company ranking first among budget airlines in customer satisfaction, according to a survey by J.D. Power. Southwest also has the lowest rate of complaints filed with the U.S. Department of Transportation. Today, the company runs 96% of its flights domestically and serves just 14 international destinations, but CEO Gary Kelly anticipates that it could add 50 additional destinations across North and South America. Southwest's highly regarded service and projections for substantial passenger growth over the next two decades suggest there would be demand to support significant expansion.
Southwest has also been delivering big dividend hikes and is in a good position to keep the increases coming. The company has quadrupled its payout over the last five years, and while the stock's yield is still relatively small at roughly 1.1%, the cost of covering its forward distribution comes in at just 15% of trailing earnings and 18% of trailing free cash flow.
Shares trade at roughly 14 times this year's expected earnings, a valuation that leaves room for significant upside in light of the company's international expansion potential and fast-growing dividend.
A dirt-cheap cash machine
Jeremy Bowman (General Motors): Buffett began buying shares of General Motors back in 2012, shortly after the automaker was relisted after emerging from bankruptcy, and he hasn't looked back since. GM seems like a natural fit in Berkshire's portfolio. The company has a slew of big global brands like Chevrolet, Cadillac, and Buick that has brought it success at home and in far-flung markets like China, which is now the world's biggest car market. Its value seems to be overlooked as auto investors have swooned instead over names like Tesla and Uber, but GM continues to spin off mountains of cash. The stock now trades at a P/E of just 5.2, which may be partly explained by the American auto cycle's having passed its peak, but it still seems excessively cheap given the strength of the underlying business. GM also offers a dividend yield of 4.7%, and that payout is secure and well-funded.
GM is making smart investments in technology and has a leading position in autonomous vehicles thanks to its 2016 acquisition of Cruise Automation, and its Cruise division has attracted multibillion-dollar investments from Softbank and Honda. The Chevy-parent has also taken a 10% stake in Lyft and is planning to launch its own autonomous ride-hailing service next year, which is currently being tested in San Francisco.
Its Bolt and Volt EVs also give it a strong position in electric vehicles, and the company has the advantage of building them in conventional production facilities, unlike Tesla, for example, which has encountered numerous production challenges. Such innovations show that GM will continue to be a power player as the car industry shifts into autonomous and electric vehicles.
Profit growth may be a challenge in the near term, but for a low-priced cash machine with a strong competitive position, GM looks like an excellent choice.
George Budwell owns shares of Johnson & Johnson. Jeremy Bowman owns shares of General Motors. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool recommends Berkshire Hathaway (B shares) and Southwest Airlines. The Motley Fool has a disclosure policy.