With the stock market looking frothy and hitting all-time highs, Buffett has lamented the lack of affordable, well-run companies his conglomerate can buy, and Berkshire has refrained from making a major acquisition for years, in large part due to inflated valuations Buffett sees across the market.
That doesn't mean retail investors are out of options, though, as there are still a number of well-priced stocks for Buffett-like available if you know where to look. Keep reading to see why Facebook (NASDAQ:FB) and Procter & Gamble (NYSE:PG) fit the bill.
It may seem strange to see Facebook on a list of Buffett stocks since the Oracle of Omaha has a long history of avoiding tech stocks. However, that's changed in recent years. Berkshire has taken stakes in Apple and Amazon, and Buffett has praised both companies repeatedly. He may want to take a look at another member of the FAANG group, Facebook.
The social network has many of the qualities Buffett looks for in a stock, including a wide economic moat, good cash flow, a reliable business model, and a good valuation. With its ownership of Instagram and WhatsApp, Facebook has come to dominate social media and digital advertising, along with Alphabet's Google. With more than 2 billion users globally, Facebook benefits from significant network effects. Users generally want to be on the platform with the most other users, and the size of its user base creates a huge barrier to entry for other social media companies. Alphabet's effort to create its own social network -- Google+ -- failed not too long ago, demonstrating how hard it can be. But Facebook has successfully borrowed concepts like trending searches and Stories from peers like Twitter and Snap's Snapchat.
Buffett was traditionally a fan of newspaper stocks, calling them local monopolies, but in the digital era their business model has been replaced by Facebook, which carries monopoly-like operating margins around 40%, another sign of its competitive advantage.
Finally, Facebook trades at a slight discount to the S&P 500 today at a P/E of 23.8, adjusting for FTC fines, and that doesn't include the company's $55 billion in cash on the balance sheet. The company is also growing much faster than the average stock in the broad-market index; it's up 25% in its most recent quarter, making it look like an all-around bargain after the recent post-earnings sell-off.
2. Procter & Gamble
Buffett has long been a fan of consumer staples, the kind of big-brand defensive stocks that stick around for generations. Coca-Cola, for example, has been a longtime holding of Berkshire's, and Buffett was also behind the recent merger that created Kraft Heinz, though that one hasn't gone so well.
Berkshire already owns a bit of P&G, the household products maker of everything from Tide detergent to Pampers, but there's a reason Buffett may want to add more to its holdings.
P&G's strengths need little introduction. The company is nearly 200 years old and owns 22 separate brands that each generate $1 billion or more in annual sales. As a maker of products that consumers need even in a recession, P&G tends to outperform the market during downturns, a common quality for Buffett stocks. The company has proven its mettle as a dividend payer -- it's a Dividend Aristocrat, having raised its dividend every year for 49 years in a row. It now offers a yield of 2.4%.
However, the best reason to buy P&G is its recent performance. The stock has soared over the last two years as a restructuring plan and a decision to sell off dozens of underperforming brands has paid off. The company is executing better than it has in years. In its most recent quarter, organic sales, which excludes acquisitions, divestitures, and foreign currency exchange rates, rose 5%, driven by strength in the beauty and healthcare segments. P&G is also seeing strong growth in China, a key market, where sales rose 13% in the quarter. Meanwhile, cost efficiencies drove adjusted earnings per share (EPS) up 16% in the period, an impressive rate for a mature company in a slow-growing sector. Management raised its full-year EPS growth guidance from 5%-10% to 8%-11%.
P&G stock tends to trade at a premium given its historical strength, defensiveness, and dividend security, and is priced about even with the market today. However, given the company's recent performance and its competitive advantages through brand power and distribution, now looks like a good time to pick up shares of this tried-and-true winner.