Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) expansion from a textile company to a multinational conglomerate made Warren Buffett, who started buying shares of the company in the early 1960s, into an investing legend. Over the past 50 years, Berkshire's stock surged over 4,300% as the company expanded its investment portfolio.
That's why investors now closely monitor Berkshire and Buffett's investment choices. But instead of focusing on Berkshire's latest purchases, many of which weren't made by Buffett himself, investors should recall the Oracle of Omaha's investing rules to see which stocks he would buy -- instead of the ones he already bought. Here are three stocks Buffett would love.
1. Netflix: A "simple" business with a wide moat
Buffett believes in investing in "simple" businesses with wide moats (i.e., competitive advantages). Netflix (NASDAQ:NFLX), which generates all its revenue from subscriptions, checks those two boxes.
Netflix's global streaming memberships rose 27% year-over-year to 193 million last quarter as people streamed more content throughout the pandemic. Its revenue rose 25% year-over-year to $6.15 billion, its operating margin expanded, and its net income nearly tripled to $720 million.
Netflix expects its memberships to grow another 23% year-over-year in the third quarter, allaying concerns regarding competition from Disney+, Hulu, and other hungry challengers. It expects its revenue and net income to rise by 21% and 43%, respectively. That stable profit growth should silence concerns that its high content production and licensing costs could overwhelm its subscription revenue.
Analysts expect Netflix's revenue and earnings to rise 24% and 50%, respectively, this year. The stock isn't cheap at just over 60 times forward earnings, but Netflix's robust growth rates, simple subscription-based model, sticky ecosystem, and wide moat all make it a stock Buffett should love.
2. General Mills: A company with "consistent earning power"
Buffett prefers companies that generate "consistent earning power" at reasonable prices. One such company is General Mills (NYSE:GIS), the packaged foods giant that owns iconic brands like Cheerios, Yoplait, and Häagen-Dazs.
General Mills is arguably a better packaged foods stock than Kraft Heinz (NASDAQ:KHC), which Berkshire owns a major stake in, for two reasons. First, General Mills raised its prices to stabilize its margins as its shipments were throttled by competition from private-label and healthier brands. Kraft cut its prices and crimped its margins.
Second, General Mills refreshed its older brands and bought growing brands like Annie's organic food and the premium pet brand Blue Buffalo. Kraft shied away from bold investments and aggressive marketing campaigns.
As a result, General Mills continues to generate rock-solid growth. Its organic sales rose 4% last year, while its adjusted EPS grew 12% in constant currency terms. In the first quarter of 2021, its organic sales jumped 10%, buoyed by pandemic-induced purchases, and its adjusted EPS grew 27% in constant currency terms.
That robust growth prompted General Mills to raise its dividend, which currently sports a forward yield of 3.3%, for the first time in two years. Its growth will likely decelerate after the pandemic ends, but the stock remains reasonably priced at 17 times forward earnings.
3. Alphabet: A stock to hold "forever"
Speaking to CNBC in 2017, Buffett admitted he "missed" the opportunity to buy Alphabet, then known as Google, in its early days. A year later, he told the same network he "should have" bought shares of Google.
Buffett hasn't disclosed any positions in Alphabet since then, but the tech giant remains a great stock to buy and hold forever. It owns the world's most popular search engine, mobile operating system (Android), web browser (Chrome), email client (Gmail), and video streaming platform (YouTube).
Its sprawling ecosystem also includes a major cloud platform, hardware devices, Waymo's driverless cars, healthcare initiatives, and other projects. It still generates most of its revenue from ads, but its top products should continue dominating their respective markets for the foreseeable future.
Alphabet's ad sales decelerated during the pandemic, but analysts expect its revenue and earnings to rise 21% and 28%, respectively, next year. Those are impressive growth rates for a stock that trades at 27 times forward earnings, and they indicate that it's not too late to buy this stock as a long-term investment.