Investors love to “buy with Buffett” and it’s no surprise why. The founder and CEO of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is one of the richest people in the world, having built a conglomerate now worth $480 billion, and he’s made many long-term investors rich along with him.
Buffett has made it clear what kind of stocks he likes. He prefers companies with sustainable competitive advantages as well as proven winners that pay dividends. Among his favorite sectors are banking and insurance, big-brand consumer goods, and energy.
However, as Sean Williams, a Motley Fool colleague, recently noted, Buffett has avoided making any big acquisitions for three and a half years now, as he believes the market is overpriced. Nonetheless, there are still Buffett-ish stocks out there for those willing to look. Keep reading to see why…
A software giant with multiple “moats”
Billy Duberstein (Microsoft): While many associate Warren Buffett with value investing in extremely cheap stocks, that impression isn’t totally correct. After all, Buffett wrote in his 1989 letter to shareholders, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
You would be hard-pressed to find a more wonderful company than Microsoft(NASDAQ:MSFT). Thanks to the genius of founder Bill Gates and current CEO Satya Nadella, Microsoft is home to not one, but several businesses with huge economic moats.
For instance, several Microsoft assets benefit from the network effect, which happens when a company’s scale locks in users with a network of benefits that competitors can’t match. That allows it to vault itself ahead of would-be rivals and establish dominance.
After all, Microsoft’s first hit product, its Windows operating system, still has a dominant 75% market share of the global PC market. The company’s Office software suite has become the standard in the enterprise world, from Word (word processing) to PowerPoint (presentations) to Excel (financial modeling). Finally, Microsoft’s 2016 acquisition of LinkedIn, the leading social network for business professionals, also benefits from a powerful network effect shared by all large social networks.
In addition to the network effect, Microsoft’s enterprise software businesses benefit from a second “moat”: high switching costs. When a huge organization adopts a solution, it becomes very hard to displace, as the organization would have to retrain workers and take considerable risk when switching vendors. Microsoft’s Dynamics enterprise resource planning and customer relationship management products benefit from high switching costs, as does the company’s hypergrowth Azure infrastructure-as-a-service.
So why hasn’t Buffett invested in Microsoft? It’s not because he doesn’t want to, but rather because Bill Gates is on the Berkshire Hathaway board of directors. With Gates involved in Berkshire, Buffett says investing in Microsoft could give the impression he has insider information. Good thing you and I don’t have that problem!
Buffett would love this “cutting-edge” healthcare stock
Sean Williams (Intuitive Surgical): Warren Buffett is arguably one of the greatest investors of our time, and his secret to success is finding great companies with clear competitive advantages and hanging onto them over the long run. That’s what makes surgically assisted robotic medical-device maker Intuitive Surgical such an interesting choice.
Intuitive Surgical has virtually no competition among other surgical system manufacturers. According to the company’s most recent quarterly report, it had 5,271 da Vinci surgical systems installed worldwide, which is well more than any of its competitors combined. That’s great news, considering that the global population is aging and that access to medical care is improving in most countries.
What’s more impressive than simply beating its competitors to the punch by more than a decade is the fact that Intuitive Surgical is primed to grow its margins over time as its installed base expands. While these da Vinci systems cost between $0.5 million and $2.5 million, it’s the company’s instruments for each procedure, and the servicing associated with its da Vinci system, that accounts for the bulk of its margins. As the company’s installed base of machines rises, it’ll generate a greater percentage of its sales from higher-margin instruments and services. This should lead to profits continuing to grow at a faster clip than sales.
The company should also have plenty of runway to expand the use of its da Vinci system. Already a leader in urology and gynecology surgeries, the da Vinci system could push for greater use in colorectal, thoracic, and general soft tissue surgeries.
Buffett may not be a big fan of healthcare stocks, but Intuitive Surgical has all the makings of a stock the Oracle of Omaha would love…
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