Though it's a matter of opinion, Berkshire Hathaway CEO Warren Buffett is arguably the greatest investor alive. Known for his simplistic yet effective buy-and-hold ethos, Buffett has transformed his initial $10,000 in investments into nearly $81 billion in a little over six decades.
But what's particularly valuable about Buffett's style of investing is that he seeks out the stock of companies with long-term competitive advantages that can be purchased and held for extended periods of time. Best of all, it's a strategy that can be duplicated by investors regardless of their age, portfolio size, or knowledge of the stock market.
The best Warren Buffett stocks to buy this year
Coming off the worst year investors have seen in a decade, and taking into consideration that high-quality businesses tend to rise in value over time, the following three Buffett stocks (i.e., companies currently held in Berkshire Hathaway's investment portfolio) look ripe for the picking.
1. Teva Pharmaceutical Industries
Check out the latest Teva Pharmaceutical Industries earnings call transcript.
Even though it's one of the oddball stocks in Buffett's portfolio, generic and brand-name drug developer Teva Pharmaceutical Industries (TEVA -0.47%) presents one of the more intriguing value propositions for investors with a longer time horizon. I say "oddball" because most stocks that Buffett buys will pay a dividend. Teva, on the other hand, suspended its payout in what was a nightmare 2017 campaign.
Undoubtedly, Teva has some kinks to work through. In recent years, it faced generic-drug price weakness, saw its top-selling brand-name therapy (Copaxone) face generic competition for the first time, settled bribery charges, saw its CEO leave, and slashed profit and sales guidance.
Then again, this is a company with a no-nonsense new management team that has trimmed the fat. A reduction of about 25% in the company's workforce, along with the aforementioned dividend cut, is primed to save Teva approximately $3 billion annually in 2019. That's a better than 15% reduction in annual expenses in a couple of years that's allowed the company to reduce its net debt from a peak of around $34 billion to less than $28 billion.
Teva Pharmaceutical is also in the perfect niche to benefit from an aging global population. Just over half the company's sales are derived from generic drugs, making it the world's largest producer of generic medicines. As brand-name medicines rise in cost, patients, physicians, insurers, and emerging-market nations that can't afford brand-name therapies will be targeting these generic medicines. Though not as high in margin as brand-name therapies, Teva's generic portfolio can provide substantial cash flow by winning at the volume game.
With a forward P/E ratio just over 5, Teva sports a rock-bottom valuation. While a turnaround may not come swiftly, CEO Kare Schultz has the company on the right path once more.
Check out the latest Visa earnings call transcript.
Don't believe for one moment that Buffett doesn't like to toss a growth stock into his investment portfolio from time to time. Investors wanting consistent growth would be wise to give payment facilitator Visa (V -0.40%) a closer look.
The thing about payment processors is that there simply aren't many that offer scale. None is recognized within the U.S. and globally more so than Visa, which creates a lot of cash flow predictability for the company's business model. Some folks prefer Visa's competitors, such as American Express (AXP -1.55%) -- also a Buffett-owned stock, I might add -- because they're able to double-dip as both a payment processor and lender, thereby earning interest on what they lend. But given the cyclical nature of the global economy, companies like AmEx are exposed to lending-delinquency risk, whereas Visa, which focuses only on payment processing, has no delinquency worries.
Speaking of the global economy, Visa's long-tail opportunity is huge. Sure, it's doing quite well in developed markets like the United States, and it's added plenty of new merchants via its 2016 acquisition of Visa Europe. But the biggest opportunity of all could be its broad-based entrance into emerging markets in the coming years and decades. An estimated 85% of global transactions are still being conducted in cash, which gives Visa more than enough opportunity to convert a portion of these purchases into credit or debit transactions.
What investors get with Visa is a company that's fully capable of double-digit growth in sales and per-share profit each year. And as the icing on the cake, Visa is valued at less than 21 times its forward EPS after averaging a P/E of nearly 33 over the past five years. Ka-ching!
3. Sirius XM Holdings
Check out the latest Sirius XM Holdings earnings call transcript.
The obvious advantage of buying into Sirius XM is that you'd own a piece of a legal monopoly. Yes, it faces competition from online and terrestrial radio operators, but no other public company has a satellite radio system in orbit. Of course, there's far more that differentiates Sirius from its competition than simply being a legal monopoly.
For starters, Sirius XM primarily makes its money from subscribers. In the company's most recent quarterly report, it listed 33.7 million subscribers who accounted for $1.16 billion of the $1.47 billion in collected revenue. Meanwhile, online and terrestrial radio relies on advertising as its main sources of income. Unfortunately, advertising tends to be cyclical and can jeopardize the entire traditional radio business model if an economic downturn is severe enough. Digital satellite subscribers, on the other hand, are far less likely to cancel their service during economic hardships, making Sirius XM's revenue stream far more predictable.
Sirius XM also enjoys relatively fixed costs on its satellites. Regardless of how many new subscribers the company adds, its transmission and equipment fees tend to be about the same. That's a recipe for steadily higher margins as the company's subscriber base expands. With high single-digit revenue growth likely through at least 2022, Sirius XM could make for a solid investment.