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3 Stocks Warren Buffett Would Love

By Leo Sun, Dan Caplinger, and Maxx Chatsko - Updated Apr 14, 2019 at 8:23PM

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Tencent, Kansas City Southern, and Thermo Fisher Scientific all have strengths that the Oracle of Omaha would admire.

Warren Buffett is one of the most closely followed investors on the planet, so an investment from Berkshire Hathaway is generally considered a major vote of confidence for a stock.

However, investors should also apply Buffett's rules of investing to stocks that Berkshire doesn't own. Today, a trio of our Motley Fool contributors will examine three stocks that might just be good enough for Buffett: Tencent (TCEHY 3.02%), Kansas City Southern (KSU), and Thermo Fisher (TMO 1.50%).

A lit-up bull climbing a stock chart.

Image source: Getty Images.

The "Berkshire of Tech"

Leo Sun (Tencent): Warren Buffett only invests in a few tech stocks, but he's famously bullish on China and loves companies with market-leading positions and wide moats. Tencent, one of the largest tech companies in China, certainly fits that description.

Tencent is the largest video game publisher in the world, and its portfolio includes hit games like League of Legends, Clash of Clans, and Arena of Valor. It also owns WeChat, the top mobile messaging platform in China with 1.1 billion monthly active users (MAUs). Its older social platform QQ hosts another 800 million MAUs.

But that's not all. Tencent owns Tencent Video, one of the top video streaming platforms in China, and a majority stake in Tencent Music, its largest music streaming platform. It offers a cloud service platform and AI services, and its payment platform WeChat Pay is one of the leading payment services in China.

Tencent also owns stakes in a growing list of tech companies in both China and overseas markets -- including retail giant, Snap, and Tesla. Tencent CEO Pony Ma's keen eye for investments even earned him the nickname the "Buffett of Asia" in tech circles.

Tencent struggled with a nine-month freeze on new gaming approvals in China last year, but that freeze was lifted in late December. Meanwhile, Tencent continues to expand its WeChat ecosystem and higher-growth cloud and payments services, which should ensure that it remains an 800-pound gorilla in Chinese tech for the foreseeable future.

Check out the latest earnings call transcripts for Tencent, Kansas City Southern, and other companies we cover.

This stock could be building up steam

Dan Caplinger (Kansas City Southern): Warren Buffett's admiration for the railroad industry is well-known, especially since Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) made its massive purchase of the Burlington Northern Santa Fe railroad company in 2009. Given that Buffett has already made his choice, a rival like Kansas City Southern doesn't really fit in his portfolio -- but that doesn't mean that it couldn't deserve your attention.

2018 was a turbulent year for Kansas City Southern, in large part because of uncertainty on the trade front. The railroad's network handles a substantial amount of cross-border commerce between the U.S. and Mexico, and so the renegotiation of the North American Free Trade Agreement had huge potential ramifications for Kansas City Southern. Also, tensions across key contributors to its business have pushed financial results in both directions, with strong shipment volume of crude oil and petrochemicals offsetting lower demand for coal shipments.

Buffett likes efficiency, and Kansas City Southern is now looking seriously at implementing initiatives related to precision scheduled railroading. Doing so should help the size of Kansas City Southern's locomotive fleet, improving operating ratios and boosting profits. If that happens, the railroad could catch up to its industry peers and get its stock moving up the mountain a lot faster in the years to come.

Life sciences research depends on this business

Maxx Chatsko (Thermo Fisher Scientific): Any companies or academic researchers probing the mysteries of living things and attempting to corral them into products with predictable function would find it difficult to avoid Thermo Fisher Scientific. The $107 billion business sells everything from lab equipment to chemical reagents to software to diagnostics and more. It commands 70,000 employees and serves over 400,000 customers across the planet.

A female scientist holding up a pill with her gloved right hand.

Image source: Getty Images.

That alone would put it on Buffett's radar, but the company's growth profile might make the Oracle of Omaha fall in love. Thermo Fisher Scientific reported full-year 2018 revenue of $24.3 billion and net income of $2.9 billion, representing year-over-year growth of 16% and 32%, respectively. A steady stream of acquisitions, product launches, and customer acquisition has resulted in revenue and net income growth of 44% and 55%, respectively, since 2014. 

The business also boasts a solid level of diversification. In 2018, the company generated 26% of its revenue from life sciences solutions, 23% from analytical instruments, 15% from specialty diagnostics, and 41% from laboratory products and services (those add up to 105%, but 5% comprised intersegment eliminations). Similarly encouraging, the company invested $1 billion in R&D last year and reduced its debt balance by $2 billion. 

Thermo Fisher Scientific expects the momentum to continue in the year ahead. As reported on the fourth-quarter 2018 earnings conference call, the business expects full-year 2019 revenue in the neighborhood of $25.08 billion and adjusted EPS of about $12.10, up from $11.12 per share in 2018. That sets the stage for another solid year of operations. Then again, given its important role serving biology-based research, that's almost a given.

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Stocks Mentioned

Kansas City Southern Stock Quote
Kansas City Southern
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
$44.62 (3.02%) $1.31
Thermo Fisher Scientific Inc. Stock Quote
Thermo Fisher Scientific Inc.
$550.30 (1.50%) $8.13

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