One of the secrets to Warren Buffett’s success is that he’s always been very picky when it comes to stock selection. He only invests in what he considers to be the very best businesses. Most companies he simply ignores.
With that in mind, today I’m going to highlight two FTSE 100 stocks that I believe Warren Buffett would have absolutely no interest in investing in at present. He wouldn’t touch these Footsie stocks and neither would I.
Warren Buffett wouldn’t buy this FTSE 100 stock
The first FTSE 100 stock I think Buffett would have no interest in is Vodafone (LSE: VOD). There are a few reasons why I believe he wouldn’t invest here.
For a start, Buffett looks for long-term growth. “Your goal as an investor should be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now,” he has said in the past.
Are Vodafone’s earnings ‘virtually certain’ to be ‘materially higher’ in five, 10, or 20 years? No. The company is going to have to spend a substantial amount of money rolling out 5G in the years ahead. This could have a negative impact on earnings.
Secondly, Buffett likes companies that generate a high return on capital employed (ROCE). This is a key measure of profitability. Companies that consistently generate a high ROCE tend to grow bigger over time. Vodafone generates a low ROCE. Over the last three years, it has averaged just 2%, which is very poor.
Finally, Vodafone has a stack of debt on its balance sheet. Buffett doesn’t like a lot of debt as it makes businesses more vulnerable during challenging periods.
All things considered, I’m confident that he would steer clear of Vodafone shares right now.
The ‘worst sort’ of business?
Another FTSE 100 stock I’m confident Warren Buffett would snub right now is International Consolidated Airlines (LSE: IAG). It’s the owner of British Airways.
Why would Buffett avoid IAG? Well for starters, he just dumped all his airline stocks due to Covid-19 disruption. “The world has changed for the airlines,” he commented at the time. It seems Buffett is worried about the terms of potential government bailouts.
Secondly, like Vodafone, IAG has a huge pile of debt on its balance sheet. At 30 June, net debt was €10,463m. By contrast, total shareholders’ equity was €779m. Buffett wouldn’t like that debt-to-equity ratio at all.
Finally, it’s worth pointing out that Buffett has warned of the dangers of investing in airlines in the past after being burnt by airline stocks himself. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” he said in 2007. “Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers,” he added.
Having been burnt by the sector again this year, I doubt Buffett will be buying any airline stocks any time soon. I’m confident he’d have no interest whatsoever in IAG.
Edward Sheldon has no position in any shares mentioned. 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.