I’m following Warren Buffett and buying these quality UK shares

Warren Buffett is known to look for economic moats in the businesses he invests in. Here are two UK companies with moats I’d buy today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Warren Buffett has had a long and successful investing career. He started out by focusing on value stocks, or companies that were selling for less than they were really worth. There were lucrative profits to be made by flipping investments in this way. But once he met Charlie Munger, Buffett refocused his efforts on finding quality companies.

This is what Warren Buffett said of the companies he looks for: “What we’re trying to do is we’re trying to find a business with a wide and long-lasting moat around it, protecting a terrific economic castle with an honest lord in charge of the castle.”

Here are two companies that match this description I’d buy today.

A strong network effect

Auto Trader (LSE: AUTO) is the UK’s biggest online marketplace for vehicles. For this reason, the company has a strong network effect, which I think forms the economic moat around its castle. Network effects are particularly good economic moats because they result from a high number of active users which is hard for a competitor to copy.

In particular, Auto Trader benefits from a large number of users looking to buy vehicles on its online platform. Therefore, car retailers and private sellers want to list their vehicles on the platform to reach the biggest audience. Auto Trader becomes more valuable as a business the more users it has. What’s more, every additional user comes at little incremental cost to the business.

I think this network effect shows in Auto Trader’s excellent profitability ratios. For example, the company achieves an operating margin of over 60%. This is the second-highest operating margin in the FTSE 100 today.

There are still risks to consider. Any slowdown in the UK economy will impact the sales of vehicles. The company isn’t fully immune to competitors, either. Other companies, such as Cinch, are investing heavily in advertising to try and take market share from Auto Trader.

Nevertheless, I consider the stock a buy for my portfolio.

Another business with a Warren Buffett moat

The next company is Rightmove (LSE: RMV), the online marketplace for the UK housing market. In many ways, it demonstrates the same network effect as Auto Trader, only this time for homebuyers and renters. Because its online property portal is the most widely used in the UK, homebuilders and estate agents must list properties on Rightmove so they gain access to this big audience.

Rightmove’s economic moat is again shown in the company’s outstanding profit measures. It achieves the highest operating margin in the whole of the FTSE 100 at 66%. Furthermore, it generates triple-digit returns on its equity, which is abnormally high for a company.

One factor to consider for the company is the strength of the UK’s housing market. Rightmove is only based in the UK, so any slowdown in home-moving would lead to reduced profits. This happened during 2020 when the pandemic unfolded. As a consequence, revenue fell 29% across the full year.

The company is in a better position today, in my view. For example, the UK’s housing market has been strong in 2021, so analysts are expecting revenue growth of 47% across the full year.

So, for me, I think Rightmove and Auto Trader are two quality UK companies due to their network effects. In Warren Buffett’s words, I think they have economic moats, and I’d buy the shares today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dan Appleby owns shares of Auto Trader and Rightmove. The Motley Fool UK has recommended Auto Trader and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »