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4 Stocks for Buffett Enthusiasts to Consider

These four firms have wide moats, strong profitability, and reasonable valuations today.

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The best investors operate with a healthy dose of humility. And that’s certainly true of  Berkshire Hathaway’s (BRK.B) Warren Buffett and partner Charlie Munger. For example, the pair has said that many investment opportunities that come their way fall into what Munger has dubbed the “too hard” pile, meaning they can’t be analyzed with any degree of certainty. In essence, they admit what they don’t know and move on. That’s a valuable lesson for individual investors, too. If an investment is opaque or hard to get your head around, rest assured that you can skip it and do just fine investing in what you understand.

Also illustrating a healthy sense of humility, Buffett has been forthright about what Berkshire’s size could mean for its future results. Whereas in the past the firm could more readily get a pop from smaller businesses it took stakes in, Berkshire’s size today means that it can only take meaningful positions in larger businesses, which aren’t likely to grow as rapidly as small or midsize firms. In  his most recent analyst report on Berkshire Hathaway, Morningstar senior equity analyst Greggory Warren gave plaudits to the firm’s growth from 2014, but asserts that “given the current size of its operations, ...the firm will struggle to generate similar levels of growth longer term.”

In that respect, individual investors actually have a leg up on Buffett. They can invest with a similar price-conscious, quality-conscious mindset, but they aren’t hamstrung by asset size in that same way that Berkshire Hathaway is. They can invest in whatever size businesses they like.

With Berkshire Hathaway’s annual shareholder meeting set to get under way this coming weekend in Omaha, we thought it would be worth revisiting a screen we’ve run in the past: for high-quality companies that generate lots of profits and cash, are trading at reasonable valuations, and are probably too small for Berkshire to take an interest in. Specifically, we looked for firms with market capitalizations of less than $15 billion that had positive free cash flows and returns on equity of more than 10% in each of the past three years. As a proxy for quality, we screened for those with moat ratings of “wide.” Within that subset, we homed in on the reasonably priced names by focusing on those firms that currently rate 4 or 5 stars.

As of April 25, 2016, four companies fit the bill. Prospective investors should note that three of these four firms carry fair value uncertainty ratings of high, meaning that it’s difficult to forecast the companies’ cash flows--and in turn set their fair values--with a high degree of certainty. Premium users can click  here to view the screen or tweak it to their specifications. Here’s a closer look at the four that made the cut.

 CBRE Group Inc (CBG)
Star Rating: 4
Fair Value Uncertainty: High
Market Capitalization: $10 billion
Morningstar sector director Stephen Ellis believes that the wide-moat status of CBRE Group, the largest commercial real estate brokerage firm, is durable. The firm provides a broad gamut of services, such as facilities management, to real estate firms, and Ellis believes that CBRE Group will continue to benefit from large real estate firms’ desire to outsource these services to a single provider. Ellis also points out that while the trend toward outsourcing facilities management and other real estate-related tasks began in the U.S., it has begun to take off globally, as well; that could allow the firm to extend its history of double-digit growth into the future.

 Jones Lang LaSalle Inc (JLL)
Star Rating: 4
Fair Value Uncertainty: High
Market Capitalization: $5.3 billion
The second-largest commercial real estate brokerage firm after CBRE, Jones Lang LaSalle stands to benefit from some of the same trends that should buoy CBRE Group in the years ahead: Real estate firms’ desire to outsource various responsibilities with a single provider, as well as increased global demand for consolidated real estate services. Jones Lang LaSalle’s shares have come under pressure so far in 2016, largely due to fear that the notoriously cyclical real estate industry may have peaked. Ellis acknowledges that the real estate cycle could be a headwind for the company in the future, but he believes that the share price is factoring in that bad news and then some.

 Polaris Industries Inc (PII)
Star Rating: 4
Fair Value Uncertainty: High
Market Capitalization: $6.6 billion
Polaris, a manufacturer of off-road vehicles like all-terrain vehicles and snowmobiles, earns a wide moat rating thanks to its brands, history of innovation, and lean manufacturing capabilities. Equity analyst Jaime Katz acknowledges that competitive pressures have been growing in the so-called “powersports” industry; she also notes that consumer spending on off-road vehicles is apt to suffer in regions whose economies are heavily dependent on the price of oil. But she notes that the firm’s growth and cash-flow generation has been formidable, and believes that Polaris shares, having been heavily marked down in 2015, look attractive today.

 Varian Medical Systems Inc (VAR)
Star Rating: 4
Fair Value Uncertainty: Medium
Market Capitalization: $8.1 billion
Morningstar regional director Alex Morozov acknowledges that Varian’s main business, radiotherapy used in cancer treatment, lacks the same pizzazz as the cancer drug market. But he thinks it should enjoy a strong secular tailwind as demand for cancer treatments grows, especially in emerging markets. He also notes that technological advances have paved the way for more targeted radiotherapy, helping to alleviate some of the concerns about radiation’s side effects. Morozov believes that as entrenched providers, both Varian and its main competitor Elekta will enjoy sales momentum over the next decade.

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