Warren Buffett has built a track record of making good stock choices for decades. From American Express at Coca Cola and, more recently, Apple, buying the right stocks at the right time did Berkshire Hathaway one of the largest publicly traded companies.
Buffett generally looks for reasonably priced stocks that he can hold for the long term. They will often include a dividend, preferably a payment that increases periodically.
However, there are some companies that you might think of as “Warren Buffett stocks” that are not in the Berkshire portfolio. Given their valuations and economic models, stocks like BJ Wholesale (NYSE: BJ), Cardinal Health (NYSE: CAH), and Qualcomm (NASDAQ: QCOM) could potentially call on Buffett and offer the returns he’s looking for.
BJ’s suffered what CFO Bob Eddy calls “transformational“changes thanks to increased business from COVID-19. This has allowed the company to generate more free cash flow in a quarter than it typically earns in a year. In addition, the debt of the company has shrunk and the retail stock is already up 78% this year.
BJ’s purchase could be compared to Buffett’s investment in Costco in 2000. At the time, Costco operated 349 warehouses and had a small presence outside of North America. Its footprint has more than doubled since then.
Now the same could happen with BJs. Since it has more capital, BJ’s is free to add locations in its central area on the east coast. Investors should also remember that companies like Costco have built investor fortunes by moving from regional to international companies. While no one expects to see BJ’s in California or China anytime soon, it has recently spread to Ohio and Michigan.
Few investors seem to have noticed it. BJ stock more than doubled from March lows. Despite this increase, it is trading at less than 16 times forward earnings. That’s significantly lower than Costco and other peers.
Additionally, it comes at a time when analysts are forecasting earnings growth of 81% for this year. They also believe profits will drop 11% in the next fiscal year as the pandemic recedes. Still, with the cash flow available to fund additional warehouses, investors shouldn’t expect market cap to stay below $ 6 billion for a long time.
Buffett is no stranger to investing in health. One of his most notable investments has been DaVita, which he first bought in 2011. DaVita remains a Berkshire stake and has produced significant returns.
Given Cardinal Health’s current situation, Buffett could potentially repeat this feat. Cardinal relies heavily on elective surgeries for his income. With the lockdown putting these proceedings on hold, Cardinal’s revenue suffered. So far, it’s a stock that hasn’t recovered to its February high.
As a result, Cardinal is now trading at a forward P / E ratio of less than nine. Moreover, despite the loss of activity, analysts still expect earnings to rise, albeit less than 1%. Nonetheless, Cardinal expects earnings growth to improve to over 8% next year as the economy recovers from the pandemic.
Plus, Cardinal also offers one thing DaVita doesn’t: dividends. Its annual dividend of around $ 1.94 per share has not only earned over 4.3%, but has also been increasing every year for over 30 years.
Additionally, the company generated just under $ 1.6 billion in free cash flow in fiscal 2020. Given that dividend expenses for this period were only $ 569 million, Cardinal can easily fund future payment increases. Once Cardinal gets past the pandemic, he could once again see the kind of growth that attracts investors like Buffett.
Buffett has long avoided technological investments. Nevertheless, after realizing his mistake, he took positions in Apple. Today, Apple is its biggest stake.
Given his potential, he might want a similar stake in Qualcomm. Qualcomm is the only major producer of a chipset needed to provide 5G service. Although this led to monopoly charges, Qualcomm was able to overturn the decision. He also fended off challenges from Apple and Intelligence in court and in the market.
A 5G upgrade cycle will likely begin with the next version of the iPhone, and Grand View Research predicts a 63.4% compound annual growth rate for 5G chipsets. Unless and until a competitor emerges, that advantage will primarily accrue to Qualcomm.
Although Qualcomm’s stock has risen in recent months, it sells for less than 19 times forward earnings. Additionally, analysts are forecasting earnings growth of over 63% next year, a forecast in line with Grand View’s forecast.
In addition, Qualcomm has also become a dividend growth stock. It introduced payments in 2003, and dividends have increased in most years since then. The current annual payout of $ 2.60 per share earns about 2.3%.
Assuming the growth of the 5G chipset is close to meeting expectations, new investors could see gains in Qualcomm that could make the Oracle of Omaha jealous.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.[ad_2]