One of the secrets to Warren Buffett’s success is that he’s very selective about his investments. He only invests in businesses that have competitive advantages, strong balance sheets, and excellent track records when it comes to generating shareholder wealth.
Here, I’m going to look at three FTSE 100 companies that I believe Warren Buffett wouldn’t invest in today. He wouldn’t buy these Footsie stocks and neither would I.
Warren Buffett doesn’t like debt
BT (LSE: BT.A) is a popular stock within the UK investment community. However, I don’t think Warren Buffett would be interested in buying it.
One reason I think Buffett would steer clear is the company’s high debt levels. In the half-year report, BT detailed net debt of £17.6bn. Meanwhile, equity on the balance sheet was just £12bn. Buffett wouldn’t be impressed with that debt-to-equity ratio.
Another reason I think he would swerve BT is that it doesn’t generate a high level of profitability. Over the last three years, for example, return on capital employed (ROCE) has averaged 8.7%. By contrast, his top holding, Apple, has averaged a ROCE of 28.7% during that period.
Given BT’s debt and lack of profitability, I think Buffett would be more than happy to put this FTSE 100 stock in his ‘no’ pile.
No economic moat
Another FTSE 100 company that I believe he wouldn’t invest in today is Aviva (LSE: AV). Buffett does like the insurance sector. Currently, he owns a number of major insurers. However, I think Aviva is an insurance stock he’d leave alone.
The reason I say this is that it doesn’t really have a competitive advantage (or economic moat as Buffett likes to call it). It doesn’t have an edge over the competition that can help it protect profits.
Now, Aviva’s new CEO, Amanda Blanc, is looking to shake things up. She’s confident that she can turn the FTSE 100 insurer into a “winner.” However, we’ve seen this kind of thing before with Aviva and the company has failed to deliver. Just look at its chart. It says a lot about the company’s poor long-term track record.
Overall, I don’t think the legendary investor would be interested in Aviva shares.
Poor long-term investment
Finally, housebuilder Taylor Wimpey (LSE: TW) is a third FTSE 100 stock that I believe Warren Buffett wouldn’t invest in.
At first glance, Taylor Wimpey does have a lot of Buffett-like attributes. For example, it has a strong balance sheet with minimal long-term debt. He would like that. Profitability has also been high recently. Over the last three years, ROCE has averaged 20%.
However, I believe the highly cyclical nature of the housebuilding industry would be a turn-off for Buffett here. During periods of economic weakness, housebuilders tend to get hit hard. This means that they’re generally not great long-term investments. Just look at a long-term chart for the share. Currently, Taylor Wimpey’s share price is nearly 50% below its 2007 peak.
Warren Buffett tends to go for stocks that are almost guaranteed to be bigger in 10 or 20 years’ time. For this reason, I think he’d pass on this FTSE 100 stock.
Edward Sheldon owns shares in Apple. The Motley Fool UK owns shares of and has recommended Apple. 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.