Warren Buffett's investing style is well known. His Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.09%) conglomerate owns several operating businesses, and invests in shares of others. But there are several things they all have in common.
Buffett doesn't chase the latest high-growth sector, or invest in technology he doesn't understand. He and his partner, Charlie Munger, look for moats in a business, the ability to generate a ton of cash, and steady recurring demand for its products. Each one of the three companies below has its own attraction, but all three make for investments Buffett would love.
Image source: The Motley Fool.
Avangrid: the best of both worlds
It's no secret that Buffett likes the prospects of the utility sector. His company has 91% ownership in Berkshire Hathaway Energy (BHE), which Buffett called one of the conglomerate's four "family jewels" in his latest shareholder letter. The company is investing billions to upgrade transmission lines and other infrastructure partly to support distribution for growing renewable energy generation. The investments will go on for decades, Buffett says, and the entity doesn't pay dividends to funnel its earnings to this growth.
Avangrid (AGR +0.00%) is another utility that should be on Buffett's radar. It has a traditional gas and electric utility business, but also owns and operates a large, and growing, renewable energy business. It's a smaller and cheaper version of the more well-known NextEra Energy (NEE 0.31%). After Avangrid closes its merger with PNM Resources this year, it will have about 8 gigawatts (GW) of solar and wind generation. That's about one-third the size of NextEra's renewables portfolio. But Avangrid plans to grow that to over 13 GW by 2025.
Both Avangrid and NextEra offer investors stability from regulated utilities, along with the opportunity for growth from renewables. Avangrid is much smaller than NextEra, with a market cap of about $16 billion versus more than $150 billion for NextEra. It also trades at a lower valuation, with a forward price-to-earnings ratio in the low 20s.
AGR PE ratio (forward) data by YCharts.
Avangrid's shares also give investors a higher dividend yield supported by the reliable utility segment. And the company expects to grow its earnings per share between 6% and 8% annually through 2025. There's a lot here for Buffett to like.
Garmin: a cash machine
Buffett has always shied away from technology companies, saying he likes to buy what he understands. But a fairly recent large position in Apple (AAPL 0.01%) bent that unwritten rule, and may have the investor feeling more comfortable with tech companies that focus on consumer products. Garmin (GRMN +0.20%) makes high-tech devices for outdoor enthusiasts including pilots, boaters, hikers, hunters, and runners. The company actually has a lot in common with Apple.
Buffett loves companies that generate tons of cash that can be reinvested to grow the business. Apple certainly qualifies, and so does Garmin, which generated $387 million in free cash flow in the fourth quarter of 2020, and ended last year with about $3 billion in cash and marketable securities. The company's cash position equates to approximately 11% of its market cap. Apple's almost $200 billion of cash on its balance sheet makes up less than 9% of its market cap.
Garmin isn't just building up a cash pile, either. Its quarterly cash flow more than covers a dividend that currently yields 1.75%, and the company continues to grow its research and development (R&D) spending as new innovations help to expand revenue. In 2019, R&D spending grew 6.75% versus the prior-year period, but that spending growth increased 16.25% in 2020. Garmin grew its overall revenue by 11% in 2020, the fifth consecutive year of sales growth. Management, which normally guides conservatively, believes 2021 will see revenue growing about 10%.
Image source: Walt Disney.
Disney: a moat like no other
If there's one thing Buffett might like more than cash itself, it is a moat for a business. That helps to ensure that growth and subsequent cash generation remain strong for years and decades. Walt Disney (DIS 0.62%) has a unique moat that is one of the strongest in the business world. And it is using that advantage to leverage its new fast-growing streaming-television offerings.
Disney reported over 146 million paid subscribers for its Disney+, ESPN+, and Hulu streaming services as of Jan. 2, 2021. It has since announced that Disney+ surpassed 100 million subscribers. The company now sees peak operating losses for the new Disney+ service occurring this year, and profitability in fiscal 2024.
And the benefits from cross-selling between Disney's media and entertainment distribution segment and its parks, experiences, and products segment is the definition of a moat. Recovery from the pandemic's effects in the travel, sports, and entertainment industries will benefit both groups of Disney's businesses for years to come. That, along with the value in the brand, is the type of business advantage that Buffett loves.
