It’s hard to argue with results, and the Oracle of Omaha has an extensive track record of great investments. He doesn’t necessarily hit on every one of his convictions, but it’s a good idea for investors to pay attention to his logic.
The two stocks below offer a compelling combination of growth, cash flow, sustainable competitive advantages, and reasonable valuation. They should at least be on every investor’s radar.
1. Visa
Warren Buffett loves to own companies that produce cash flow and have sustainable competitive advantages. Berkshire Hathaway’s significant investment in Visa (NYSE: V) reflects those qualities.
Consumers often associate Visa with banks because the brand features prominently on credit and debit cards, but it isn’t a financial institution. Visa provides payment-processing services; it’s a fintech business that provides the “plumbing” for transactions all over the globe.
IMAGE SOURCE: GETTY IMAGES.
Visa holds the largest market share among its peers, so its financial results depend on competitive performance and overall economic activity. Payment volumes rise and fall with economic cycles, and there’s not much that Visa can do to avoid that. However, the processing industry is projected to average double-digit annual growth over the next decade. If investors can manage the cyclicality, the long-term trends create a bullish foundation for continued growth.
The financial sector is being disrupted by blockchain and other fintech innovations. Disruption is a challenge for dominant incumbents like Visa, so investors need to be wary of the new forces shaping the market right now.
Fortunately, incumbents can also benefit from disruption if they embrace innovation and stay at the forefront of emerging trends. That’s easier said than done, but Visa appears to be navigating those challenges so far. It has maintained a large market share, continued to expand, and raised its already impressive return on invested capital (ROIC) throughout recent years. These are all signs that new technologies aren’t forcing Visa off its perch.
V Return on Invested Capital…
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