There are many reasons why Warren Buffett is arguably the most famous active investor today. He’s put together an amazing long-term stock buying winning streak that helped Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) defeat the market since 1965.
Some of these bets, such as Buffett’s financial crisis investments that paid huge dividends from 2008, would not be available to regular investors. However, it has been more frequent for the billionaire to have been successful in focusing on some key investment characteristics, such as strong consumer brands and unusually high profit margins.
With that bigger picture in mind, let’s take a look at why Buffett might love TJX Companies (NYSE: TJX), House deposit (NYSE: HD)and The New York Times (NYSE: NYT) as investments today.
Image Source: The Motley Fool.
1. TJX companies: an unwanted retailer
Buffett began his career by observing deeply undervalued actions. However, he found more lasting success in purchasing proven winners, such as American express and Coca Cola, who were already well known on Wall Street. He was even more excited about these “wonderful deals” if they had recently fallen out of favor with investors.
That is happening right now with the TJX companies, which in late May reported a brutal 50% drop in sales during the period when COVID-19 measures were stricter. The out-of-price retailer has fallen 14% during the first half of 2020, while the overall market is down just 2%.
There is a good chance that the owner of the TJ Maxx, Marshall and Home Goods brands will regain their previous path of consistent market share gains in the coming quarters. It is even possible that sales trends will accelerate further as consumers focus more spending on household products. TJX companies will undoubtedly capitalize on disruptions in the broader industry to stock up on high-quality merchandise.
2. The New York Times: sometimes smaller is better
Buffett’s biggest downside in the past decade is that his portfolio is so large that his options are limited to finding game-changing investments. Even quickly doubling a $ 20 billion purchase would hardly be noticeable in a portfolio that includes large pieces from global giants like Apple.
Most investors don’t have that problem, so we can look for smaller companies when looking for tremendous long-term growth.
The New York Times fits that category, with a market capitalization of less than $ 8 billion. Shareholders have seen a solid year so far, with earnings of 31% through June. However, that growth could be the start, if the company can succeed in building a viable newspaper content business that doesn’t rely on advertising to fuel the bulk of its profits.
The early days of the COVID-19 pandemic have provided good proof of that proposal, and the media company has been succeeding thus far. It now has more than 4 million subscribers to its growing portfolio of digital products, and that foundation protected earnings as advertising revenue fell 15% in the fiscal first quarter.
3. Home Depot: a premium giant with cash efficiency
Warren Buffett studies many financial metrics when evaluating a business, but one of his favorites is the return on invested capital (ROIC). An impressive ROIC is the first of its three main criteria when considering a major acquisition (the other two are good and honest management and an attractive selling price).
Home Depot has this quality of capital allocation in spades. The cash efficiency of the home improvement leader typically outperformed that of the rival Lowe’sBut it has reached a new gear since 2009, jumping to nearly 40% compared to Lowe’s 22%. That’s good enough to make Home Depot one of the most cash efficient companies on the entire market.
YCharts HD Invested Capital Return Data.
Sure, Buffett would be less impressed with the stock price. With over 25 times last year’s earnings and 2.5 times sales, Home Depot is not priced low today.
But investors who prefer their portfolio style may want to have at least a small part of this business, or keep it on their watch list alongside TJX Companies and The New York Times, in case another market passes out.
