What many investors respect about Warren Buffett is his integrity in choosing companies based on sound financials and principles. He’s not one to “take a flyer” on a stock. If he can’t justify it with his investment logic, he passes it up.
He has his checklist full of favourites like strong brand name, high profit margin, high return on equity and low manageable debt to name a few. As for taking big chances that look like rewarding opportunities, he once wrote:
A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, problem…. Overall, however, we’ve done better by avoiding dragons than by slaying them.
In the late 1960s when he was managing the investment money of his business partners, the US stock market was rising higher and higher, but he didn’t feel he needed to be “in the market” to make some easy cash.
He instead liquidated the partnership fund and returned the money to investors because he couldn’t find anything that matched his value investing style. The market sold off heavily shortly afterwards, so his integrity helped him dodge a bear market bullet.
Here are four stocks that have some of the hallmarks of what he might call a marvellous business.
1) SEEK Limited (ASX: SEK) has very strong brand name as the leading job search website. The company estimates it is involved in about 25% of formal job placements in Australia. It has high revenue and earnings growth rates supported by wide profit margins.
2) Brambles Limited (ASX: BXB) is a global supply-chain logistics company known by its CHEP brand of pallets and containers that so many businesses, warehouses and transport companies use. It keeps growing bigger with its steady rate of acquisitions around the world.
3) Invocare Limited (ASX: IVC) operates a network of funeral homes, cemeteries and crematoria slowly growing across Australia. It buys out competitors who mostly are small, private owners in an industry that new entrants aren’t attracted to. The business can grow right along with the average death rate and population growth.
4) Coca-Cola Amatil Ltd (ASX: CCL) bottles and distributes Coca-Cola and other beverages in Australia. Recently the retail market has been challenging and company earnings are expected to drop about 15%. This short-term setback may be the very example of a great investment opportunity in the quote above. Buy into a temporary, solvable problem and reap the rewards later.