‘Britain’s Warren Buffett’ just bought this stock. Should I buy it too?

Fundsmith manager Terry Smith just added a new stock to his fund. Edward Sheldon is wondering if he should follow suit and buy it himself.

| More on:

Fundsmith portfolio manager Terry Smith is often called ‘Britain’s Warren Buffett’. It’s easy to see why – since he launched his fund in 2010 he has delivered enormous returns for investors.

Recently, Smith started a new position in his flagship fund and I’m wondering if I should follow him and buy the stock (which has fallen about 40% since late November) for my own portfolio. Let’s take a look.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

‘Britain’s Warren Buffett’ has spotted an opportunity

The stock Smith has been buying recently is Adobe (NASDAQ: ADBE). It’s a leading provider of creative software (Photoshop and Premiere Pro are two of its key products). It also offers marketing and data analytics software that helps e-commerce businesses give customers better experiences.

Listed in the US, Adobe currently trades at around $390, down from near $700 in November last year. At the current share price, it has a market-cap of about $184bn.

A classic Fundsmith stock

I can see why Smith likes Adobe. For a start, the company is generating strong top-line growth on the back of the expanding digital content market (i.e. YouTube). Over the last three financial years, revenue has climbed from $9bn to $15.8bn. This year (ending 3 December), Wall Street expects revenue of $17.9bn.

Secondly, profitability is very high. Over the last three years, return on capital employed (ROCE) has averaged 25.7% (Smith loves high ROCE companies). Meanwhile, gross profit margin has averaged 86% over this period. A high gross margin should protect it from inflation.

Additionally, the company has a very strong brand and reputation. Adobe’s Premiere Pro, for example, is generally seen as the gold standard in video editing software. This provides a competitive advantage and gives it pricing power (which could also help it beat inflation).

Finally, it has a strong balance sheet with a low amount of debt. So overall, Adobe is a classic Terry Smith stock.

Should I buy Adobe shares?

Adobe is actually a stock I’ve been monitoring pretty closely recently. I think it has a lot of appeal, and in July last year, I highlighted it as a stock I wanted to buy in the next stock market crash.

At the time, the valuation was very high. With the share price near $600, the forward-looking P/E ratio was near 50. Today however, it’s a different story. With analysts expecting earnings per share of $13.70 this year, the P/E ratio is now only 28.

At that valuation, Adobe is a ‘buy’ for me. This is a high-quality business with plenty of growth potential. Now that the P/E ratio is under 30, I see growth at a reasonable price. I’d be comfortable buying the stock for my own portfolio at that valuation.

Of course, the big risk here is that technology stocks could continue to underperform. This year, rising interest rates have hit the tech sector hard. There could be further pain for the sector ahead in the near term.

However, in the long run, I think there’s a good chance this stock will do well. That’s because it’s set to benefit from the growth of both the digital content and the e-commerce industries.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Edward Sheldon has a position in Fundsmith. The Motley Fool UK has no position in any of the shares mentioned. 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

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

An under-the-radar FTSE 100 stock to combat stagflation fears

As the share price of this blue-chip FTSE 100 stock falls below Covid-levels, why I added it to my portfolio.

Read more »

Man smiling and working on laptop
Investing Articles

This stock market sell-off could be my buying opportunity of the decade

The market sell-off has been brutal, but this Fool thinks it offers him a compelling opportunity to make big money.

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

After falling 60%, is the Ocado share price a bargain?

The Ocado share price has fallen heavily in the past year. But our writer is still not buying it for…

Read more »

Hedge shaped as the pound symbol inside a glass piggy bank
Investing Articles

A question investors need to ask about the Woodbois share price

The Woodbois share price has declined a little from its peak in early May. Does that mean I should buy…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value stocks I’d buy right now

Roland Head thinks market conditions could favour value stocks over the coming year. He’s found three he’d like to buy…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

These 5 FTSE 100 shares have crashed in 2022. I’d buy one now

These five FTSE 100 shares have plunged in value over the past six months. But I believe one of these…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

Is Scottish Mortgage Investment Trust now a bargain growth stock?

The Scottish Mortgage Investment Trust share price has plummeted nearly 50% from its 52-week high. Is this a great opportunity…

Read more »

A couple celebrating moving in to a new home
Investing Articles

2 key stock picks for reliable passive income

I’m looking at stocks that can deliver reliable passive income to complement my growth picks, and I think I’ve found…

Read more »