For years now, Sirius Minerals (LSE: SXX) has been one of the most-traded stocks on the London Stock Exchange. Clearly the company, which owns the world’s largest and highest-grade deposit of polyhalite (used to make fertiliser), has generated a lot of interest among private investors.
Would Warren Buffett invest in Sirius though? I doubt it. Here’s a look at two reasons I believe Buffett wouldn’t be interested in SXX shares.
Buffett likes proven performers
The first thing to understand is Buffett likes to invest in large, well-established companies that have proven track records. He doesn’t invest in speculative small-cap companies like Sirius.
For example, look at his portfolio and you’ll see names such as The Coca-Cola Company, JP Morgan Chase, and American Express. All of these have very large market capitalisations, have been around for a long time, and have generated brilliant returns for investors over the long run.
Sirius Minerals, by contrast, has a market-cap of just £225m (around 0.1% the size of Coke), and has been a wealth destroyer for many investors over the years as the company hasn’t achieved its goals. So it’s fair to say that Sirius is not the kind of stock Buffett goes for.
Buffett likes quality
It’s also worth noting that Buffett tends to invest in high-quality companies. By this, I mean companies that:
Generate consistent revenues and profits
Generate a high return on equity (meaning they’re very profitable)
Have low debt (this provides protection during downturns)
Have strong liquidity (meaning they can always pay their bills)
Looking at Sirius, it fails horribly in the ‘quality’ department. For example, it has no revenues, cash flows, or profits. It’s also dependent on third parties for funding. All things considered, it’s a low-quality stock.
Given Sirius’ lack of positive attributes, I’m pretty confident that Buffett would give the stock a wide berth.
That said, there are plenty of UK stocks that do fit the Buffett mould. For example, Unilever is one stock that has a lot of the attributes he looks for in an investment (he actually tried to buy the stock a few years ago). It owns a powerful portfolio of everyday brands such as Dove soap, Ben & Jerry’s ice cream, and Lipton tea, is very profitable, and it has a brilliant track record when it comes to generating shareholder wealth.
Diageo is another classic Buffett-style-buy, in my view. It owns a world-class portfolio of alcohol brands including Johnnie Walker, Smirnoff, and Tanqueray. Like Unilever, it’s a highly profitable company and it has been a brilliant long-term investment over the years.
Finally, accounting and payroll specialist Sage, which is owned by some of the UK’s top portfolio managers including Terry Smith and Nick Train, is another stock that has many Buffett qualities. It’s highly profitable and has delivered truly life-changing returns since it listed on the stock market back in the early 1990s.
Given Buffett’s success in the stock market (he’s worth over $80bn), I think it makes sense to invest in these kinds of companies if you’re looking to make money from stocks, as opposed to investing in speculative small-caps like Sirius.
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Edward Sheldon owns shares in Unilever, Diageo and Sage. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Sage Group. 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.