Warren Buffett's performance in the stock market has been epic, and his methods will no doubt be studied by generations of investors to come. Even as his net worth has soared into the tens of billions, the famed value investor continues to make solid picks and create new wealth for his fellow shareholders in Berkshire Hathaway (BRK.A -1.15%) (BRK.B -0.99%).
But Buffett doesn't have a monopoly on good ideas. In fact, one of the Oracle's most endearing qualities is that he candidly admits the mistakes he has made and talks about stocks for which he missed the boat. In light of that, we asked three of Foolish contributors to name businesses they think Buffett would love to own, but doesn't. Their picks: American Tower (AMT 0.03%), Canadian National Railway (CNI -0.28%), and Disney (DIS 0.76%).
A classic "ham sandwich" play
Anders Bylund (American Tower): Buffett likes simple businesses. His largest holdings include food producers, cable operators, and household products specialists. Sure, it wasn't easy to build these great companies up from nothing over many decades, but they have all evolved into flip-a-switch success stories. With all due respect to the executives running Buffett's favorite companies, those people could arguably be replaced by a tray of ham sandwiches and their operations would hardly miss a beat.
In that vein, I can hardly think of a simpler business than American Tower. This company buys, builds, or leases cell towers and small-cell networking sites across America, as well as several high-growth countries. Then, American Tower leases out space on these cell sites to telecoms and broadcasters, typically under multiyear contracts with annual step-ups built into the agreements. All of these assets are managed under a tax-efficient real-estate investment trust structure, which keeps Uncle Sam's fingers away from the profits while guaranteeing generous dividends to shareholders.
This fantastically simple business has nearly doubled its revenues over the last five years while almost tripling its annual free cash flow. Dividend payouts increased steadily over the same period, expanding by a total of 156%. If its current dividend yield of 1.7% seems skimpy, it's low because the stock price also soared by around 125% over the past five years.
There's no magic formula here, just an efficient and incredibly simple business plan being executed by a brilliant management team that focuses on long-term growth opportunities in places like India and South America, while also reaping the rewards of the current 5G wireless rollouts in North America.
I can't speak for Warren Buffett, but the Oracle of Omaha should absolutely love this rock-solid cash machine.
This stock could easily pass Buffett's checklist
Neha Chamaria (Canadian National Railway): Among Berkshire Hathaway's many wholly-owned subsidiaries is BNSF Railway, North America's largest railroad (in terms of rail network). Given that exposure, it's therefore not too surprising that you won't find any other railroad stocks in its portfolio. Yet, if not for BNSF, there's one stock I strongly believe Buffett would love to own -- Canadian National Railway.
Notably, CN is among the five largest stocks in the Bill & Melinda Gates Foundation Trust's portfolio. That Gates and Buffett are longtime friends and philanthropy partners may have something to do with the resemblance between their investing styles, but that's a story for another day. The point here is that CN has most of the characteristics Buffett generally looks for in a stock.
To begin, CN's network provides it with a huge economic moat -- it is the only railroad in North America that connects the three coasts of the Atlantic, Pacific, and Gulf, allowing it to move goods worth a whopping 250 billion Canadian dollars per year. Doing business at that scale, however, wouldn't be possible but for CN's nimble and visionary management, again a quality Buffett seeks out in companies. In the first quarter, for instance, CN put a larger number of locomotives and railcars into service to deliver record volumes, despite exceptionally challenging weather conditions.
Consistently strong returns on capital employed and equity, prudent capital allocation, and an unbeatable dividend growth record since 1996 further add to CN's appeal, and make it a typical Buffett-like stock.
It's never too late to right a wrong
Nicholas Rossolillo (Disney): Once upon a time (in 1966, to be exact), the world's greatest investor owned a 5% stake in the Magic Kingdom -- long before it was the $250-plus billion entertainment giant it is today. A year after his purchase, Buffett sold his shares in Walt Disney's small theme park and cartoon business, banking a tidy double-digit-percentage return on the investment.
Selling out early has cost Buffett billions in profits, and will go down as one of the worst sales of stock he ever made. Nevertheless, it's never too late to right a wrong -- especially when the wrong is not being invested in a rock-solid business that owns many of the world's most recognizable entertainment brands, and trades at an attractive valuation. Plus, Disney is getting ready to disrupt the disruptor, pulling the rug out from under Netflix (NFLX -2.50%) by yanking back the movie and TV content it licensed to the streaming leader, and redeploying it to its own Disney+ and Hulu services.
Disney isn't the tiny, high-growth-potential stock it was in the mid-1960s, but there's plenty of gas left in its tank. In the wake of its takeover of 21st Century Fox, Disney is the dominant force at the global box office. It also has multiple platforms upon which it can engage with its fan base, from theme parks to digital content to toys. It all adds up to a business that should provide modest but consistent and defensible growth for years to come. That's the type of stock that Buffett loves.
The cherry on top is that the stock currently trades for just 16 times earnings, a reasonable price considering the growth projects Disney has underway. Buffett surely sold way too soon, but this story could still end happily ever after.