Please ensure Javascript is enabled for purposes of website accessibility

1 Under-the-Radar Financial Stock Warren Buffett Loves

By Matthew Frankel, CFP® and Jason Hall – Sep 11, 2021 at 6:41AM

Key Points

  • This ratings company is a stalwart in its field.
  • Its operating margins are very attractive.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's a company with a wide moat and a large market that Berkshire Hathaway owns a lot of.

Warren Buffett is well known for his love of bank stocks, but one of his biggest financial-sector holdings is a company investors might not be as familiar with. In this Motley Fool Live video clip, recorded on Aug. 30, Fool.com contributors Matt Frankel, CFP, and Jason Hall discuss what the company is, what it does, and why it is such a big part of Berkshire Hathaway's (BRK.A 0.66%) (BRK.B 0.59%) stock portfolio.

10 stocks we like better than Moodys
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Moodys wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of August 9, 2021

 

Matt Frankel: You're going to talk about this one at first -- and I want to chime in on this as well -- is Moody's (MCO -0.81%), MCO.

Jason Hall: Yeah. What I actually wanted to do with Moody's just because I think it's so interesting. We've talked about S&P Global recently, and there's basically three companies that pretty much are like the ratings companies for basically everything public, whether it's corporate debt, corporate credit ratings, all of these things that they do that put them in a position of just immense power that does this.

I'm going to show this chart. Seventy-four percent gross margins, and if you notice right here, you can see the margins are actually trending up. Although five-year charts, you see the margins trending up. Operating margins, trending up. Cash margins, I really wanted to show that, we were talking a massive cash cow business.

The first chart that I showed, this is the global financial crisis. This is the real estate bubble, the debt bubble, all that stuff, and it brought the company's operating margins down, cash margins for a period of time. But again, the idea back here, we thought these businesses were going to be in big trouble and that the federal government was going to regulate the heck out of it, and the business model was potentially a major threat. But as we've seen, the cash flows and the margins have continued to flow in really well.

Where I think Moody's is really well positioned right now is sure, this is still really important to ratings, still that's their core business, but it's an analytics business now.

Frankel: Yeah. I mean, the core business is the rating's business by far, I think that's what really attracted Buffett to it. They don't own the business but there's three major players. There's S&P [Global] (SPGI -1.10%), there's Moody's, and there's Fitch Ratings. I bet you can't tell me who No. 4 is. I don't know who it is.

Hall: It's not worth knowing.

Frankel: No, it's not worth knowing. But then they have their analytical tools. It's very similar business to S&P Global, if you caught our show a few weeks ago where we talked about that. They're one of the top players in a market that only has a few players. I think that's really what appealed to Buffett here. It's a financial-sector company. He pared back a lot of this financial-sector holdings. I don't really see his Moody's stake going anywhere. They own a little over 13% of the company right now, and I think it's going to stay that way.

Hall: I think if anything, it's going to go up because, again, this is the ideal Buffett company in a lot of ways. It pays a dividend, it raises that dividend every year, has for a dozen years now. Because of its scale and its size, they're going to start buying back shares over time, so you're going to see so many of those other Buffett stocks. Even though Buffett might never buy another share, its position is going to grow because the company does its repurchasing thing and brings that share count down. Those are the things that make it very Buffett.

I think it's easy too just to assume. There's three of these companies, they each have their share of the market, and it doesn't really change meaningfully from one year to the next. It seems like it's not just really not, "Why own it?" But at the end of the day, the company's going to get medium-, low-single-digit growth in revenue. But because of its business model, the incremental margins and the incremental cash margins from those revenues are why you've saw on the chart, its margins and operating income metrics continue to increase at an outsized rate. It can grow earnings and cash flows by a double-digit rate every year simply because those new sales are worth more money.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares), Moodys, and S&P Global. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Moody's Stock Quote
Moody's
MCO
$289.53 (-0.81%) $-2.36
Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
BRK.A
$475,843.00 (0.66%) $3,130.99
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
BRK.B
$315.13 (0.59%) $1.86
S&P Global Stock Quote
S&P Global
SPGI
$347.14 (-1.10%) $-3.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.