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Berkshire Coverage

Want to Be Like Buffett? These Stocks Can Help

Although these three firms might be too small for Berkshire, they have great competitive advantages, and our analysts think they're cheap, too.

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It's a common refrain among stock investors that they want to be more like Warren Buffett. This shouldn't come as a huge surprise given Buffett's gleaming long-term record and folksy charm. But it is much easier said than done to follow Buffett's advice in buying companies with strong competitive advantages at a discount and holding them for extremely long periods of time. It takes strong nerves to fight the natural human urge to want to trade more frequently or buy into the latest craze.

So it might seem like a safe bet just to copy everything Buffett does. However, this doesn't buy a ticket to success. Buffett himself has said many times that he expects his investment returns going forward to pale in comparison with his past success. The sheer size of his portfolio means he isn't able to take advantage of smaller opportunities and must instead focus on mega deals such as buying Burlington Northern Santa Fe or Lubrizol. Investing in or buying a small company just doesn't have a major impact on  Berkshire Hathaway's (BRK.A) (BRK.B) earnings power.

In many ways, individual investors dealing with much more modest sums are at an advantage. They can buy into small firms without worrying about moving the stock price. Last year, we ran a screen for some companies that fit Buffett's investing style but were much too small for him to consider. Of the firms that passed, we highlighted  Western Union (WU),  Expeditors International (EXPD), and  Applied Materials (AMAT)

Frankly, most of these stocks haven't performed that well during the past year. Only Applied Materials' 22% return during the last 12 months bested the S&P 500's return of more than 15%. Western Union is down 15%, while Expeditors lost more than 13% during the same time period. But the short-term underperformance is no reason to panic or throw out Buffett's principles. Our analysts still think these companies' wide economic moats are intact, and Western Union and Expeditors are trading below their Morningstar fair value estimates. Despite a rocky year for these stocks, investors who have the patience to hold on could still be richly rewarded. It's a matter of staying focused for the long term and trying to drown out the short-term noise. 

As part of our coverage of the Berkshire Hathaway Annual Meeting this weekend, we thought we'd run a screen again using the  Premium Stock Screener. We searched for wide-moat firms that had Morningstar Ratings for stocks of 4 or 5 stars. We also required that these firms had positive free cash flows for the last three years, produce returns on equity in excess of 10%, and have a market cap of less than $10 billion.  Click here to run the screen for yourself. Below are three firms that passed the screen.

 Waters (WAT)    
| Fair Value Uncertainty: Medium | Market Cap: $8 Billion   
From the  Premium Analyst Report:
Waters' long-term prospects remain solid even if academic and government demand is suppressed during the next few years. The firm's enviable technological prowess and leading share in many of the markets it serves are likely to continue yielding returns on capital well above those of its peers, validating the company's wide economic moat.

 John Wiley & Sons (JW.A)    
| Fair Value Uncertainty: Medium | Market Cap: $2.3 Billion    
From the  Premium Analyst Report:
John Wiley & Sons' science, technology, medical, and scholarly, or STMS, unit is the most attractive of the firm's three publishing enterprises. We assign the firm a wide economic moat, a rarity for a publishing company. The STMS business, which generates about two thirds of overall operating profit, sells content to academic and institutional libraries that consider the journals and books to be must-have content. Wiley's key publishing areas within STMS include physical sciences, health sciences, humanities, and life sciences. The firm is consistently at or near the top of its peers in the Thomson ISI Journal Citation Report, a leading evaluator of journal influence and impact. The rankings reflect the frequency that peer-reviewed journals are cited by researchers in other journals or texts. Authors and researchers want to be associated with the leading journal in their specialized field, so there isn't much appeal for competitors to start a rival publication.

 C.H. Robinson Worldwide (CHRW)    
| Fair Value Uncertainty: Medium | Market Cap: $9.6 Billion     
From the  Premium Analyst Report:
C.H. Robinson operates an attractive non-asset-based model in an expanding industry, and its robust value proposition drives shippers to outsource more of their transportation and logistics requirements. The company does not own tractors or trailers, so a variable-cost structure and low capital intensity drive high returns on capital throughout the economic cycle. Robinson's returns on invested capital averaged more than 30% during the past decade, which is the highest of the transportation firms we cover. Moreover, Robinson is by far the largest domestic U.S. truck broker, and its immense network of shippers and carriers bestows a robust economic moat that should help protect economic profits for years to come.

Data as of May 2. 

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.