Warren Buffett has made a lot of money with a very straightforward investment strategy. Buffett simply looks for high-quality businesses that have strong competitive advantages, are very profitable, are not drowning in debt, and are not trading at crazy valuations. Then he invests in them for the long term.
It’s a really simple strategy that literally anyone can replicate. With that in mind, here’s a look at two Warren Buffett-style FTSE 100 stocks I like the look of right now.
This stock has a fantastic track record
Sage (LSE: SGE) is a provider of cloud-based accounting and payroll services. It has a global reach, serving millions of businesses across the world.
Sage ticks a number of boxes when it comes to Warren Buffett’s criteria. Firstly, it has a strong competitive advantage. Once businesses sign up for an accounting system, they’re unlikely to switch to a competitor any time soon as that would require a huge amount of time and effort.
Secondly, the company is highly profitable. Over the last five years, return on capital employed (ROCE) has averaged 18%.
Thirdly, Sage has a strong balance sheet with a low level of debt relative to equity.
Finally, the FTSE 100 company has an outstanding dividend growth track record. While many companies have suspended or cancelled their dividends this year, Sage has actually increased its payout.
All in all, Sage is very much a high-quality business. I think it’s a classic Warren Buffett-style company. At its current valuation (its forward-looking P/E ratio is 26.1), I see it as a buy.
One of the most profitable firms in the FTSE 100
Hargreaves Lansdown (LSE: HL) is the UK’s largest investment platform. The company has around 1.4m active clients and has assets under administration of nearly £100bn.
This FTSE 100 company also ticks a lot boxes on the Buffett checklist.
For starters, it has a number of competitive advantages. One is its huge market share in the retail investment management industry. Its share of the UK investment platform market is over 40%. Another is that, like Sage, it enjoys an element of customer ‘stickiness’. Once you have your investment portfolio set up on a platform, it’s a hassle switching to another provider.
Hargreaves Lansdown is also a very profitable company. In fact, it’s one of the most profitable companies in the entire FTSE 100 index. Over the last five years, ROCE has averaged 79%.
In addition, the company has a very strong balance sheet. It literally has no long-term debt on its books, which is an impressive achievement.
Hargreaves Lansdown is not the cheapest stock in the FTSE 100. Currently, it trades on a forward-looking P/E ratio of 27.7 if we use the consensus earnings figure for the year ended 30 June 2020. But the stock is well below its 52-week highs. That kind of out-of-favour share price weakness could appeal to Warren Buffett.
Edward Sheldon owns shares in Sage and Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown 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.