Playing follow-the-leader when it comes to investing can be a tricky game, and a money-losing one, because you're not inside the mind of the investing gurus and don't necessarily understand the rationale behind their stock picks.
Yet when that guru is Warren Buffett, who has a track record stretching back decades, maybe riding on his coattails isn't such a terrible strategy. While basing your entire portfolio on his picks might not be a sound strategy, this team of Motley Fool contributors thinks picking up one or two stocks such as Axalta Coating Systems (NYSE: AXTA), Amazon.com (NASDAQ: AMZN), and Restaurant Brands International (NYSE: QSR) might not be a bad idea to copy.
Follow this leader? That could be a winning game. Image source: The Motley Fool.
A Buffett pick you've never heard of
John Bromels (Axalta Coating Systems): A lot of Buffett's picks are companies that have become household names, Amazon and Burger King included. But Buffett also has some money in stocks that most folks have never heard of, like his $716.7 million stake in paint and coatings manufacturer Axalta Coating Systems. The fact that it's so under-the-radar (at least, for Buffett) may spell opportunity, albeit a somewhat risky one.
Axalta primarily makes paint and coatings for vehicles of all types, but also has a division devoted to coatings for other products like pipes, sculpture, and even roller coaster tracks. The company saw a big jump in share price in June when management revealed that it had formed a committee to explore strategic alternatives to maximize shareholder value. Specifically, in the press release announcing the change, the independent presiding director of Axalta's board, Mark Garrett, said this includes "a potential sale of the company."
So why should you consider buying Axalta now? Remember that a potential sale isn't a sale until the ink is dry. It actually put itself on the selling block back in 2017 and wasn't able to find a buyer, which is why the market's reaction is more muted than it otherwise might be.
But if a buyer can be found, the price is likely to go up. And it would be unusual for Garrett to specifically mention a possible sale unless the company had some solid prospects, lest he damage his credibility with a second rebuffed sale in two years. Still, there is the distinct risk that if a sale doesn't come quickly, the market may sour on the stock. That's why this pick is a bit of a risk and isn't for everyone.
But even if Axalta can't find a buyer, it is -- as usual with a Buffett pick -- a well-run company that's been growing revenue and net income. And even with the stock's recent pop, its P/E is near an all-time low, and in line with other players in the industry. If you're willing to swallow the risk, you might consider taking a closer look at Axalta.
Buffett didn't blow it: Amazon still has room for growth
Jamal Carnette, CFA (Amazon.com): Earlier this year, the financial world was rocked when Berkshire Hathaway's 13F filing revealed an investment in Amazon.com. However, this appeared choreographed years in advance: Although Buffett himself did not make the investment, The Oracle noted "he blew it" by not investing in the company earlier.
I (respectfully) disagree with Buffett. He didn't blow it, because Amazon continues to boast three business lines with long runways for growth:
- E-commerce may seem ubiquitous, but it's only 10% of total retail spend and continues to grow at multiples of the broader industry.
- Amazon Web Services will continue to benefit from increased computing and storage functions as AI proliferates.
- Amazon's nascent digital advertising business will continue to post strong growth rates and solidify market share behind Alphabet and Facebook.
However, there's a recent catalyst that makes Amazon a great investment now: Over the last two years, Amazon's formidable e-commerce business was thought to be under threat from brick-and-mortar challengers, mainly Walmart, that were desperately trying to win market share by any means necessary. A recent report from tech news website Recode, however, challenges that view and notes Walmart is looking to scale back its operations in the digital channel as losses mount.
Recode's report is a rather large departure from the prevailing narrative that Walmart was playing to win and, if true, could lead to Amazon building upon its huge lead in the e-commerce space. Walmart may cease investing for the long term, but Buffett continues to do so. Join him and buy Amazon stock.
A winning bet on burgers
Rich Duprey (Restaurant Brands International): Check the headline feeds on Restaurant Brands International, and you're more likely to see reference to meat-substitute maker Beyond Meat (NASDAQ: BYND) than you are to its own burger joint, Burger King.
That's because Burger King has been testing out Beyond Meat's plant-based burger patties and finding out that its customers surprisingly like them. Burger King has expanded the test it was running of the faux beef sandwiches, and other burger chains have partnered with either Beyond Meat or its rival Impossible Burger, such that the two substitute-burger companies are actually having trouble keeping up with demand.
But Warren Buffett obviously likes Burger King's parent for more than just a test of plant-based burgers. It also owns Canadian coffee shop Tim Hortons and fried chicken chain Popeyes. But the whole company is controlled by 3G Capital, the private equity firm Buffett likes to do business with, such as his partnership with it on the Kraft Heinz merger.
The Brazilian investment firm is a smart, slick operator that often takes positions in consumer goods companies, an area that remains a favorite of Buffett, regardless of his recent forays into tech (see the above section on Amazon).
Burger King, though, remains the biggest component of Restaurant Brands by far, generating over two-thirds of the restaurant operator's sales in 2018. Last quarter it also enjoyed the best systemwide sales, up over 8%, and had the best comparable-sales growth, up 2.2%. A stepped-up social media presence and strategic marketing that's directly challenged archrival McDonald's has translated into better sales.
Restaurant Brands International is a stock investors can still sink their teeth into.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Alphabet (C shares) and Amazon. John Bromels owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool has the following options: short October 2019 $82 calls on Restaurant Brands International. The Motley Fool has a disclosure policy.