2 quality growth stocks and 3 Buffett words of advice

What does “The Oracle of Omaha” look for in a stock?

| More on:
a woman

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

The wonderful thing about hearing the investing wisdom of Warren Buffett is that it isn’t overladen with long-winded explanations or high finance calculations. Considered probably the greatest investor of our time, the “Oracle of Omaha” isn’t out for high risk investments and doesn’t look at share prices when investigating the value of a business.

So what does he look for? In three words, it might be sustainable competitive advantage. Firstly, a company must have a competitive advantage that sets it apart from its competitors and protects it in some way from having to discount its product. A can of beans can only go down in price when compared to another can of beans.

Here are two quality companies that have strong competitive advantages and high margins.

Sirtex Medical Limited (ASX: SRX)

The maker of medical products for liver cancer treatments, it has a competitive advantage from its specialised technology that sets its products apart. One way investors can see a competitive advantage is by high profit margins and a high return on equity.

Sirtex usually achieves net profit margins of about 18% – 20%. A regular company could be operating with margins of anywhere between 2% and 10%, but when competition or a weak economy comes, that could be cut quickly.

Sirtex also has a high return on equity, usually around 20%. Average companies may get around 10% – 20%. It shows it is making good money on the investment of its net assets.

REA Group Limited (ASX: REA)

The operator of property sales website realestate.com.au is another company with both a high profit margin and return on equity.  Over the past three years, its net profit margin is an average 30% and its return on equity is usually in the mid-30% range.

Buffett could see this company has a strong competitive advantage as the number one leading real estate website that keeps customers coming back again and again.

Are these two companies’ competitive advantages sustainable over the long-term? They could be. If their margins and returns can be maintained, then they can look forward to further strong growth. They both have high price/earnings ratios, but that’s the premium to be paid for their quality and earnings potential.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »