Warren Buffett has a long track record of picking high-performing stocks, but maybe he is missing a few opportunities. Here are three stocks that our analysts feel would fit perfectly in the Oracle of Omaha's portfolio.
First, Buffett loves brands, which explains his "buy commodities, sell brands" motto. Recently pegged by Interbrand as the 22nd most valuable brand in the world, with a value of nearly $20 billion, Nike clearly falls into this category.
Next, Buffett loves companies with impenetrable moats around their businesses. Consider for a moment that SportOneSource recently revealed that both Nike and its Jordan brand saw their share of the U.S. athletic market in both footwear and apparel grow in 2014, even though they already held dominant positions.
Thanks to this powerful business, Nike has grown its revenue by 8% annually over the last five years, to $27.8 billion in 2014. Thanks to its growth prospects in years ahead, Nike still has the boldness to declare itself as a "growth company" despite its $82 billion market capitalization.
Buffett also loves wildly profitable companies, and Nike's earnings per share have risen by 11% annually over the last five years. If that's not enough, the company is only getting more profitable: Nike's return on invested capital stood at a remarkable 24.5% in 2014, nearly 4 percentage points higher than the 20.7% posted in 2010, meaning its margins have expanded.
Nike trades at a premium with a forward P/E ratio of 26.9, according to Morningstar, versus the 18 offered by the market as a whole. But in this case, Buffett's oft-repeated statement that "it was far better to buy a wonderful company at a fair price than a fair company at a wonderful price" certainly suggests Nike's lofty, but fair, price should not be not cause for concern.
When it comes to buying Nike, all I can say to Buffet is: just do it.
Dan Caplinger: Warren Buffett is a great investor who has taken the insurance-company model and turned it on its head to generate huge profits over time. Yet even though Buffett's portfolio includes healthcare plays such as Johnson & Johnson and Express Scripts, it lacks the health insurance component that industry leader UnitedHealth Group (NYSE:UNH) could provide to add exposure to a potential high-growth area.
Many investors have been nervous about UnitedHealth Group and other health insurance providers in the aftermath of implementation of the Affordable Care Act. Yet even with the uncertainties involved in Obamacare's evolution, UnitedHealth has done well by taking baby steps in participating in health insurance exchanges, letting some early kinks in the system work themselves out before assessing the full profit potential from the business. Meanwhile, focusing on its Optum health services division has paid big rewards, combining the power of a pharmacy benefit manager, tech-support service, and health management information provider for plan participants into a single unit that has grown quickly. Finally, with UnitedHealth's international expansion through its 2012 purchase of Brazil's Amil having gone well, investors have started to see the global potential of UnitedHealth as it takes its business model and starts applying it to healthcare systems in other nations. Buffett has always recognized the value of a well-run business, and UnitedHealth Group has done well in taking advantage of its opportunities even in an uncertain industry environment.
Perhaps Buffett never invested in Starbucks because he is not a coffee drinker, preferring a can of Cherry Coca-Cola instead. Coca-Cola has been one of Buffett's favorite stocks for years given that "the might of [its] brand name, the attributes of [its] products, and the strength of [its] distribution systems gives it enormous competitive advantages." Starbucks shares all of these characteristics.
Starbucks has a tremendous brand, ranked No. 76 in the world by Interbrand, which it uses to sell ground-up coffee beans at high prices to millions of people around the world every day. More importantly, Starbucks has shown that it can use that brand power to raise prices, which is the hallmark of a great business.
The company has a dominant market share; it basically created the market in which it competes and has 21,300 stores around the world. Starbucks' increased presence in an area drives greater sales per store as more people pick up the coffee habit and become Starbucks customers for life.
With pricing power and a constantly growing customer base, Starbucks has boosted its consolidated operating income at a 22% compound annual growth rate over the past three years. Meanwhile, revenue grew at a 12% annual rate.
While Starbucks isn't especially cheap at a forward P/E of 21, you would be hard-pressed to find this strong of a business at a lower price.
Dan Caplinger owns shares of Berkshire Hathaway. Dan Dzombak has no position in any stocks mentioned. Patrick Morris owns shares of Berkshire Hathaway, Coca-Cola, Johnson & Johnson, Nike, and Starbucks. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, Express Scripts, Johnson & Johnson, Nike, Starbucks, and UnitedHealth Group. The Motley Fool owns shares of Berkshire Hathaway, Express Scripts, Johnson & Johnson, Nike, and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.