Warren Buffett once said, “If you are a know-something investor, able to understand business economics and to find 5 to 10 sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk.” In this article, we’ll try and identify 10 companies with sensible valuations that have competitive advantages. As Buffett says, if we can find 10 of those companies, it doesn’t really matter how diversified they are. Taking the long-term competitive advantages idea further, ideally, we are looking for companies that have an…
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Warren Buffett once said, “If you are a know-something investor, able to understand business economics and to find 5 to 10 sensibly priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk.”
In this article, we’ll try and identify 10 companies with sensible valuations that have competitive advantages. As Buffett says, if we can find 10 of those companies, it doesn’t really matter how diversified they are.
Taking the long-term competitive advantages idea further, ideally, we are looking for companies that have an economic moat, and work at expanding that moat. It usually means companies that have high and growing returns on equity – for our screen we are using 20%.
We also want to find companies that have been able to increase earnings consistently over the past 5 or 10 years, and we’ll avoid companies that Buffett refers to as “outside his circle of competence”. That means annual earnings per share growth of more than 10% over the past 5 and 10 years.
With those criteria in mind, I’ve trawled through every one of the ASX-listed companies and narrowed my search down to a number of candidates that Buffett might be interested in. We know his Berkshire Hathaway has already bought a piece of Insurance Australia Group Ltd (ASX: IAG), but what else might he be interested in?
Well, the list is probably no surprise, containing some of Australia’s most well-regarded businesses, plus some surprises.
|Company||Market Cap ($m)||Share price||Return on equity (ROE)||10-year EPS growth|
|Amcor Limited (ASX: AMC)||16,352.2||14.06||43.1%||11%|
|TFS Corporation Limited (ASX: TFC)||617.4||1.78||21.3%||19%|
|Silver Chef Limited (ASX: SIV)||298.3||9.46||22.5%||17%|
|Credit Corp Group Limited (ASX: CCP)||456.4||9.85||21.4%||12%|
|SEEK Limited (ASX: SEK)||5,364.9||16.11||21.7%||28%|
|AIR N.Z. FPO NZ (ASX: AIZ)||2,912.0||2.69||27.5%||15%|
|Flight Centre Travel Group Ltd (ASX: FLT)||4,272.9||43.49||22.4%||13%|
|Domino’s Pizza Enterprises Ltd. (ASX: DMP)||5,243.2||58.72||26.4%||18%|
|REA Group Limited (ASX: REA)||6,834.7||51.55||35.2%||35%|
|Webjet Limited (ASX: WEB)||498.3||5.97||23.2%||16%|
|Blackmores Limited (ASX: BKL)||2,793.6||164.45||54.9%||19%|
|ResMed Inc. (CHESS) (ASX: RMD)||12,302.1||7.88||22.4%||17%|
|Ramsay Health Care Limited (ASX: RHC)||13,360.4||66.68||25.9%||25%|
|CSL Limited (ASX: CSL)||48,579.8||103.95||48.1%||24%|
|FSA Group Ltd (ASX: FSA)||125.1||1.05||21.0%||17%|
|Westfield Corp Ltd (ASX: WFD)||21,092.6||10.19||27.2%||19%|
|Folkestone Education Trust (ASX: FET)||544.1||2.24||22.7%||13%|
|Payce Consolidated Limited (ASX: PAY)||138.9||7.00||29.5%||29%|
|Spark New Zealand Ltd (ASX: SPK)||5,769.0||3.24||22.5%||28%|
|TPG Telecom Ltd (ASX: TPM)||9,002.3||10.60||24.4%||20%|
Source: S&P Global Market intelligence
Blackmores, CSL, Domino’s, REA Group, Ramsay Health Care and TPG Telecom are probably no surprise to be on this list, given their performance. But the list does highlight a number that aren’t as well known but could surprise in future – like Silver Chef, Credit Corp, Flight Centre, Air New Zealand, FSA Group, Folkestone Education Trust, Payce and Spark New Zealand.
Webjet has for many years sailed under the radar, steadily growing its business. TFS Corp has only recently begun harvesting its sandalwood plantations and could go on to be a big winner – although the company is much higher risk nowadays as we outlined here.
Buffett’s approach to investing has perhaps been most succinctly summed up by the man himself:
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”
Concocting a portfolio from the list of companies above would almost certainly be a winner over the long-term – although you might have to wait for a rational price for some.
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Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.