High barriers to entry, low capital requirements, and solid growth prospects make a formidable investment proposition. But the stock’s down 15% over the last five years and close to a 52-week low.

What is VeriSign

One of the first things businesses do is establish an internet presence by building a website – typically ending in ‘.com’. When they do this, they register their domain name to prevent anyone else using it. VeriSign is the company they register their addresses with. The firm operates the registry of websites ending in ‘.com’, ‘.net’, and ‘.edu’.

Importantly, it has a contract with Internet Corporation for Assigned Names and Numbers (ICANN) giving it the exclusive rights to do this. So anyone wanting a .com website has to pay VeriSign. 

The .com contract only runs for six years – and it expires in November – so there’s technically a risk. But there’s also a right of renewal if VeriSign maintains a reliable service, which it has done so far.

Financials

VeriSign is an outstanding business and it shows in the firm’s financials. Providing an indispensable service in an important industry has generated 4% annual revenue growth since 2014.

Operating margins have expanded from 56% to 67% over the last decade. By anyone’s standards, that’s huge and the company’s ability to maintain these demonstrates how difficult it is to disrupt.

In addition, VeriSign’s low capital requirements have allowed it to return significant amounts of cash to shareholders. Through share buybacks, the firm has reduced its share count by 26% over 10 years.

The result has been 12% annual growth in earnings per share and a 257% increase in the company’s share price. But with the business still looking resilient, why has the stock been going down lately?

Valuation

The short answer is valuation – as Buffett points out, it’s always possible to pay too much for a business, no matter how wonderful it is. And VeriSign has been a good demonstration of this recently.

Five years ago, the stock traded at $207 and the company made around $6 a share in free cash flow, implying a 3% annual return. The business hasn’t changed much since then, but the investing landscape has. 

Specifically, interest rates have increased. A 3% return might have been attractive when a 10-year government bond was yielding 2%, but it isn’t with bond yields at 4.5%. 

That’s why the VeriSign share price has been falling and there’s a risk it might continue to do so. If interest rates don’t fall as quickly as investors expect, the stock could well go lower from here.

A buying opportunity?

Rather than predicting what interest rates and bond yields might do in the future, I’m focusing on the current opportunity. And with the stock down 20% over the last year, I think there’s an opportunity.

VeriSign generated $7.81 in free cash per share last year, which is a 4.3% return at today’s prices. Given the likely growth ahead of the business, considering locking that in today could be a smart move.

The post This underappreciated Warren Buffett monopoly could be a smart buy after a 20% drop appeared first on The Motley Fool UK.

Apple 

What it does: Apple is the largest consumer technology company globally, with the iPhone being its most valuable source of revenue.  

By Charlie Keough. For me, it has to be Apple (NASDAQ: AAPL). The stock is Warren Buffett’s largest holding. And with him signposting it as one of the best businesses in the world, it would be difficult to disagree. 

Apple products are used by over one billion people across the globe. And its grip on the market is glaring to see. Buffett once said to invest in companies where you can easily understand and appreciate their core features. This certainly rings true for Apple.  

The company has also placed a large emphasis on returning value to shareholders, highlighted in the latest quarter where it sanctioned an additional $90bn for share buybacks.  

There’s the potential that demand slows down as inflation continues to bite away at consumers’ wallets. And the mixed reaction to its recently announced VR headset priced at $3,499 highlights this threat. However, with its iconic brand and vast customer base, I’d happily snap up Apple shares.  

Charlie Keough owns shares in Apple.  

PayPal

What it does: PayPal is a financial technology company operating an online payments system and serves as an electronic alternative to traditional paper methods such as cheques and money orders.

By John Choong: Although Warren Buffett’s main fund, Berkshire Hathaway doesn’t own PayPal (NASDAQ:PYPL) stock, its subsidiary in the form of New England Asset Management does — which is often referred to as the Oracle of Omaha’s secret portfolio.

PayPal may have reported an excellent quarter of results, beating Wall Street’s estimates and even upgraded its outlook for the year, but the market still chose to punish the stock. Investors seem to fear margins declining and have ignored the board’s strategy of acquiring lower-margin unbranded customers first and then converting them into higher-margin branded ones.

Nonetheless, I see this as a buying opportunity more than anything. The platform has shown that its strategy works and has a strong track record of doing so. And if the market isn’t buying that, I will when the shares’ multiples are at their decade lows. After all, as Buffett once said, “be greedy when others are fearful”.

John Choong has positions in PayPal.

The Coca-Cola Company 

What it does: The Coca-Cola Company manufactures many of the world’s best-loved beverages including Coke, Fanta and Sprite. 

By Royston Wild. To use one of its old slogans, when it comes to dividends, The Coca-Cola Company (NYSE:KO) truly is “the real thing.” 

The soft drinks business — which is the fourth-biggest holding in Berkshire Hathaway’s investment portfolio — has raised annual dividends for an eye-popping 61 years in a row. 

This stunning record reflects the colossal brand power of its beverages. Demand for them remains high even when times get tough, giving the firm excellent earnings stability. In fact, their enduring popularity allows Coca-Cola to effectively raise prices during economic downturns.

Net revenues rose 5% between January and March even as broader consumer spending remained weak, latest financials showed. This was driven by an 11% increase in selling prices. Meanwhile global unit case volumes rose 3% year on year. 

Coca-Cola has to paddle hard to succeed in a congested marketplace. But its proven ability to beat back the competition and grow long-term earnings makes it a rock-solid buy in my book.

Royston Wild does not own shares in The Coca-Cola Company or Berkshire Hathaway. 

Verisign

What it does: Verisign provides domain registry services for websites.

By Stephen Wright. I own shares in no fewer than five stocks from the Berkshire Hathaway portfolio (plus Berkshire itself). But if I could only buy one Warren Buffett stock, it wouldn’t be any of them.

Instead, I’d choose Verisign (NASDAQ:VRSN). I’ve never bought the stock because it’s always looked expensive to me, but if my choices were limited, I’d choose it as my one stock to buy.

So what does Verisign do? Put simply, it provides domain registry services for websites – any website ending with ‘.com’ or ‘.net’ pays Verisign a registration fee.

In other words, it’s like having a toll booth on the internet. And best of all, its business is protected by agreements giving it exclusive rights to perform this service.

Those agreements renew automatically, provided the company meets its obligations. Berkshire owns around 12% of the business and I think it might be the best stock it owns.

Stephen Wright owns shares in Berkshire Hathaway.

Visa

What it does: Visa is a digital payments firm that connects consumers, merchants, and financial institutions in over 200 countries.

By Ben McPoland. The global war on cash continues. And while notes and coins are stubbornly holding out against digital payments, I think there’s only one eventual winner. That’s why I’d buy Visa (NYSE: V).

The company is astonishingly profitable. In approximately 12 weeks to March 31, net income totalled $4.3bn, up 17% year on year. Incredibly, the net profit margin was just shy of 53%!

Another big attraction is that Visa is a natural hedge against inflation. That’s because it takes a tiny cut of every transaction that occurs on its network, regardless of how much items cost.

One risk worth noting is that US legislation aimed at improving competition among credit-card networks is being reintroduced. It would enable merchants to route payments through alternative (and potentially cheaper) networks to Visa’s. However, the bill isn’t certain to pass, particularly as it could open up a plethora of security risks.

Given Visa’s dominance, the stock is also quite pricey. So it may be better to accumulate on dips.

Ben McPoland owns shares in Visa.

The post “If I could buy just one Warren Buffett stock, it would be…” appeared first on The Motley Fool UK.

It’s on Warren Buffett’s radar, though. In fact, Berkshire Hathaway owns just over 11% of the entire company.

The business has predictable growth ahead, is extremely difficult to disrupt, and (I think) trades at a decent price. The stock is Verisign (NASDAQ:VRSN).

The stock

Verisign shares have fallen by around 27% since the start of the year. As a result, the company now trades at a price-to-earnings (P/E) ratio of 25.

Verisign’s business provides domain registry services for websites. Put simply, anyone with a website ending in ‘.com’ or ‘.net’ pays a fee to Verisign to register their domain name.

Importantly the business is protected by exclusive rights agreements. In other words, anyone wanting to register a .com or .net domain has no choice but to go through Verisign.

Verisign therefore effectively has a protected monopoly while the agreements remain in place. But the .net agreement expires in 2023 and the .com agreement expires in 2024.

The good news, though, is that the contracts renew automatically provided the company meets its contractual obligations. So there’s little danger of a competitor taking away Verisign’s business.

The company charges $8.39 for a .com domain and $9.02 for a .net. The terms of its contract currently allow for a 7% annual increase in .com fees and a 10% increase in .net ones.

Risks

I think that Verisign shares could be a terrific investment for me this month. But any investment comes with risks and there are some that it’s worth noting here.

Strictly, there’s a non-zero probability that Verisign’s contracts won’t be renewed. That would be devastating for the business, but I think this is highly unlikely.

The more likely risk, in my view, comes from the number of .com and .net websites declining. That sounds strange at first sight, but here’s the threat that I can see.

As I see it, the danger is that more and more websites might be replaced by apps. As online products and services move towards app-based offerings, the number of websites might decline.

Right now, though, that danger doesn’t seem to be materialising. In fact, the company reports that the number of domains continues to grow. 

A growth stock to buy

As a final thing to note is that, Verisign is also buying back shares. The number of shares outstanding has decreased from 167m in 20212 to 109m today.

Overall, I think that this is a really attractive growth stock for me to buy in October. I’ll be looking at joining Warren Buffett as a shareholder.

The post 1 under-the-radar growth stock to buy in October appeared first on The Motley Fool UK.