Warren Buffett's Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.76%) may have lagged the overall market of late. But let's face facts -- the Oracle of Omaha has outperformed the market more often than not, and his disciplined, value-oriented approach should drive superior results again in the future.
In other words, doing things the way Buffett would do them is still good advice.
To this end, investors looking to follow in Warren Buffett's proven footsteps may want to consider Microsoft (MSFT 0.73%), Walmart (WMT +0.55%), or even General Electric (GE +1.85%) at this time. None of them are current components of the Berkshire Hathaway portfolio, but they easily could be, and arguably should be.
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Microsoft has turned itself into a top-notch tollbooth
For years Buffett has eschewed technology stocks, explaining that he doesn't like to own companies he doesn't understand. Although he didn't explicitly name the software giant as a company he was deliberately avoiding, Microsoft was part of the mix he just couldn't get behind.
The Microsoft of then isn't the Microsoft of today, however. Then, the company's Windows operating system and office productivity suites were its core revenue drivers as well as market leaders. But both were cyclical, and consistently under attack by competitors. Now, the company's business model is much more diversified, and monetized quite predictably.
For instance, as of the three-month stretch ending in September, revenue from subscriptions to the commercial version of cloud-based Office 365 grew 21% year over year. Access to cloud-management platform Azure is also offered on a recurring, subscription basis, and Azure's revenue was up 48% year over year. The company's even applying the model to its Xbox video gaming business. CEO Satya Nadella noted during the company's most recent earnings call that there are now more than 15 million Xbox Game Pass subscribers, while separately, there are now something on the order of 100 million Xbox Live subscribers.
All this subscription revenue has turned the company into the sort of cash cow that Warren Buffett would love...the leading cash cow in its category. As much as Microsoft has driven income growth in just the past couple of years, operating cash flow and free cash flow growth have been just as impressive (if not more so).
Buy General Electric because nobody wants it
General Electric may be the past decade's biggest fall-from-grace story. It was once a titan within the industrial sector -- not to mention the world's biggest company -- but years of sloppy spending and misguided management forced GE into a deep retreat. It's spent the last several years shrinking its way back to success by selling off divisions it can't fix, and working to fix the business units it's had to.
The picture looks somewhat brighter now than it did just a year ago. CEO Larry Culp explained in September that the company's cash flow for the second half of this year would be better than the first half's, building on a fiscal pivot that seemed to take shape in the middle of this year. Following the company's surprisingly profitable third-quarter report posted in October, Culp upped General Electric's fourth-quarter free cash flow outlook to "at least $2.5 billion," then added that more such growth could be in the cards for 2021.
Still, General Electric's something of a mess.
Its current condition wouldn't necessarily deter Warren Buffett, though, nor should it deter you. As Buffett has frequently said, investors should "be fearful when others are greedy, and greedy when others are fearful." It's a memorable way of explaining how most investors wait too long to make buying and selling decisions.
And he would know. Buffett ended up making a killing on Goldman Sachs and Bank of America by buying big stakes in both in the midst of the subprime mortgage meltdown.
If General Electric has indeed rebuilt itself for the future, the time to buy is now.
Not yesteryear's Walmart
Finally, though it's a category-leading all-American business that's easy to understand, many investors may be surprised to learn that Berkshire Hathaway doesn't own a stake in Walmart.
That wasn't always the case. The fund established a position in the world's biggest retailer beginning in 2005, and didn't begin selling shares until 2017. Berkshire Hathaway wrapped up its exit of Walmart in 2018, seemingly making at least a little more room for its stake in rival Amazon.
Don't read too much into Buffett's apparent disinterest in the brick-and-mortar retailer, though. Much has changed for the company in just those two years. Namely, it's continued to develop its e-commerce operation into something that can legitimately compete with Amazon. Last quarter's online sales grew another 79% year over year, with the retailer's curbside pickup offering remaining a hit with pandemic-pressured consumers. The decision made in the middle of the year to add non-grocery goods to its curbside pickup options has made a world of difference to shoppers.
And that's just one of the moves the company has made to turn its stores into lifestyle centers that keep consumers coming back as paying customers. Walmart continues to build its network of health clinics, now offers completely free deliveries to Walmart+ subscribers, and is even testing technology consultation services akin to Best Buy's Geek Squad at some stores.
It's not clear how much indirect revenue these and other efforts will be able to add to the retailer's top line that it wouldn't have been able to produce anyway. But there's no denying that these initiatives utilize Walmart's physical footprint to forge customer relationships in a way that Amazon simply can't.
