Invest Like Warren Buffett: 4 Top Stocks With Highly Valued Brands
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Contrary to what Wall Street brokerage houses and the financial media may have you believe, investing in the stock market doesn't have to be overly complex and complicated. In fact, many of the best investments come from personal observation -- finding a company that has made a positive difference in your life and whose products or services you admire. Of course, it always helps to have this insight early in a company's growth phase, but frequently even that is not necessary.
Warren Buffett and Coca-Cola
Consider for example Warren Buffett's investment in Coca-Cola (NYSE: KO) for Berkshire Hathaway in 1988. At the time, Coca-Cola was the world's leading beverage company, an established and preeminent brand, and the stock had gone up nearly 20% a year for eight years in a row. Although Wall Street thought Buffett "was downright crazy," Berkshire Hathaway's $1 billion stock purchase is now worth around $14.5 billion with billions of dollars in dividends paid out over the years.
Although few individual investors are likely to rack up a track record like Buffett's, his Coca-Cola bet is informative for amateur and professional stock pickers alike. Essentially, Buffett purchased a stake in a leading global brand equity with a highly successful and easy-to-understand business at a compelling valuation and held on for the long-term.
This investment method can certainly be repeated by individual investors today. With this in mind, this article will examine four leading companies with three things in common -- a brand which displayed impressive growth in 2012, a stock which is trading at a reasonable valuation and a business that is both easy-to-understand and has compiled a track record of success.
Apple (NASDAQ: AAPL)
While this one may seem like a no-brainer, the recent steep pullback in the stock may be causing some investors to pass on a great opportunity. According to data taken from interbrand.com, the Apple brand experienced a staggering 129% growth rate in 2012 and is now the second most valuable brand in the world. Behind who else? Coca-Cola, of course!
A powerful brand serves as a durable competitive advantage for a company, or as Buffett likes to call it, a "moat" around the business. In addition to a highly valuable and growing brand, Apple's business is one that can be understood by most investors. In fact, many people use its leading products, iPod, Mac, iPhone, and iPad, on a daily basis.
Finally, Apple's stock is extraordinarily cheap using traditional metrics. In fact, Apple may be the world's cheapest large-cap tech stock. The shares are currently trading at a trailing P/E of under 10, a forward multiple of below 9, and a PEG ratio of 0.51.
When you back out the massive pile of cash that the company has on its balance sheet, the operating business is trading at a considerably lower valuation. Although nothing in the stock market is a slam dunk, Apple fits the criteria laid out above perfectly and will likely provide solid returns for investors for years to come.
Google (NASDAQ: GOOG)
According to data from interbrand.com, the Google brand added 26% in value in 2012 and is now the fourth most valuable in the world. It is ubiquitous and has attained an enviable cache with global Internet users. This moat that the company has been able to create around its business makes the stock a sound investment with upside.
The company's core business is also fairly simple and straightforward -- an attractive quality in any investment. Google dominates the Internet search market and has leveraged this position into a dependable and lucrative stream of ad revenue. Furthermore, until very recently, the stock was trading at an extremely compelling valuation which implied very little innovation premium.
Over the last year, Google shares have jumped roughly 34%, and now the stock is reasonably priced. Before the large rally, this was a very undervalued stock. Even at today's prices, however, Google still appears to be an attractive investment. At current levels the shares trade at a trailing P/E of just under 26, a forward multiple of roughly 15.5 and a PEG ratio of 1.35.
Ralph Lauren (NYSE: RL)
This iconic retailer broke into the world's top 100 most valuable brands in 2012. According to interbrand.com, the Ralph Lauren brand itself is worth over $4 billion. Investors who identified the potential of the company and its strong brand profile early on have been richly rewarded. Over the last ten years, the stock has climbed better than 760% and currently is sitting near new all-time highs.
Even at today's prices, Ralph Lauren is a compelling long-term investment. The business is straightforward, steady, and generates large amounts of cash. It is also experiencing significant operating momentum, highlighted by a very impressive jump in revenue in fiscal 2012.
Furthermore, at its current valuation, and with a dividend yield of a little less than 1%, the stock continues to look like a solid bet. Both the stock's P/E ratio and PEG ratio are below its sector average. Its forward P/E of 19 certainly seems reasonable for such a high quality company with a track record of creating shareholder value.
Deere & Co. (NYSE: DE)
This is another iconic brand which saw significant momentum in 2012. Interbrand.com estimates that the John Deere brand added 16% in value last year with a valuation of around $4.2 billion. Even more interesting is the fact that Berkshire Hathaway became a shareholder in the Moline, Illinois-based company last November. According to Berkshire's most recent 13-F filing, which highlights its long equity positions, the stake was valued at around $344 million at the beginning of 2013.
Deere & Co. is the world's largest maker of agricultural equipment. As such, the business meets the criteria of not being overly complicated or difficult for the average investor to understand. The company's management team has also cultivated a long-term track record of creating shareholder value. Over the last ten years, the stock has climbed around 345% and the company has paid its shareholders a dividend every quarter.
Given the quality of the business, Deere's growing brand footprint, and a dividend yield above 2%, the stock continues to look inexpensive. The shares trade at a trailing P/E of around 11, a forward multiple 10, and a PEG ratio of 1. At these levels, investors should seriously consider following Berkshire's lead into Deere & Co.
Should I Buy These Stocks?
Although the four stocks highlighted above may not make investors fabulously wealthy over the short-term, there is a good chance that these names will continue to trounce the market in the coming years. They make attractive investments due to their strong (and growing) brand moats, successful and straightforward business models, and reasonable valuations.
Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!