Warren Buffett once said he could earn returns of 50% a year -- if only he had less money. Why? It's far easier to make $210,000 double than $210 billion -- the size of Berkshire Hathaway's (ticker: BRK.A, BRK.B) equity portfolio. Buying a small- or mid-cap stock simply can't meaningfully move the needle for Berkshire, and even if it was reasonable, BRK couldn't buy a substantial stake without driving the price up or becoming a majority owner. Instead, the stocks Buffett has to buy are almost all mega-cap stocks, and to outperform an index he has to concentrate his bets. Berkshire's top 10 holdings make up 82% of its portfolio. The average valuation of a top-10 holding is $240 billion. Make use of your advantage: here are seven value stocks to buy that would make Buffett envious.
Safety Insurance Group (SAFT)
Buffett's business of choice, famously, is insurance. For decades now, the Oracle of Omaha has been buying up insurers, then using the premiums collected to invest in more high-quality businesses. Safety Insurance Group, a Boston-based property and casualty insurer, makes its bread and butter selling car insurance, and the actuaries and underwriters have done their jobs, with SAFT stock advancing from $40 in 2012 to $100 today. Another strong reason SAFT makes the cut among the best would-be "Warren Buffett stocks" is its lovely combination of a 3.7% dividend and no long-term debt. Plus, if Berkshire did deign to buy this stock, it would fold into Berkshire-owned Geico beautifully.
If you look at Berkshire Hathaway's stock portfolio, it doesn't take long for certain patterns to emerge. For example, Buffett's top eight holdings are all either consumer goods stocks or financials. But the ninth-largest position is Moody's Corp. (MCO), which is in the services sector, and technically shares an industry (business services) with CBIZ. CBIZ offers services and solutions for small- and mid-sized businesses, mostly centered around managing finances and employees. Accounting, handling taxes, even consulting on valuation, risk and mergers and acquisitions -- CBIZ is almost like a mini Goldman Sachs (GS) in that respect. Yet another reason a poorer Buffett might consider this when perusing for the best stocks to buy: Berkshire owns $3.7 billion in Goldman shares, or 5% of the overall company. If Berkshire wanted an equivalent dollar amount of CBIZ, it'd have to own 290% of the $1.3 billion company.
There's almost no question that if Warren Buffett were given $20 million to manage -- as opposed to the $214 billion he's tasked with allocating at Berkshire -- he'd err toward the financial sector. But arguably Buffett's best major investment was in a boring consumer goods company called Coca-Cola Co. (KO). It wouldn't be shocking if the $20 million Buffett picked a gem from that sector and rode it higher, setting out to be a billionaire once more. Sketchers isn't a prototypical Buffett stock because when compared to Nike (NKE) it's a definite underdog, and Buffett enjoys competitive moats. But with a $5.6 billion valuation to Nike's $143 billion size, Sketchers has so much more potential to grow. Sales have risen 20% annually for the last five years, and despite jumping 56% in 2019, shares go for 14 times forward earnings and a price-earnings-growth ratio below 1.
CIT Group (CIT)
By numbers alone, CIT Group looks like one of the most compelling value stocks in the market today. It's a commercial banker (with some consumer services) that focuses primarily on offering lending, leasing and other financial help to small- and middle-market companies. Key services include equipment financing, real estate lending, rail car leasing and even more obscure products like interest rate derivatives, foreign exchange services, bridge loans and letters of credit. CIT has proven both successful and resilient over the years, going back to 1908. The services it provides can be complex and niche-oriented, and just because large banks don't have the incentive or expertise doesn't mean the need for such services disappears. CIT has a market value of $4 billion and trades for less than 10 times earnings. It pays a 3.3% dividend and as recently as August the stock saw a spree of insider buying.
NMI Holdings (NMIH)
The next value stock that might have found itself on Warren Buffett's buy list if it wasn't too insignificant to move the needle for a modern-day Berkshire is NMI Holdings, a $1.8 billion company specializing in mortgage guaranty insurance. Another arcane business that sprang from the well of a turbo-charged capitalist economy, mortgage insurance allows lenders to lower the risk of underwriting loans to everyday buyers, in turn helping the consumer afford a mortgage they normally wouldn't qualify for. NMIH also offers outsourced loan review services for mortgage originators on the lookout for high-risk borrowers. While revenue grew 32% last quarter and profits were 52% higher, NMIH trades for just 14 times earnings.
The Bancorp (TBBK)
The holding company of The Bancorp Bank, TBBK is a stock Buffett will almost certainly never touch, as its $540 million market cap is more or less a rounding error for Berkshire. Even if Berkshire owned the entire company and shares quintupled overnight, Berkshire Hathaway's stock portfolio would advance by just 1%. For everyday retail investors, however, TBBK is certainly a viable option. Although standard services like checking and savings accounts aren't earth-shattering, TBBK's focus on digital banking lowers overhead costs associated with physical branches, and as a major prepaid credit card issuer, the company's margins are incredible. Shares go for 9.8 times forward earnings and 1.2 times book value.
Allegiant Travel Company (ALGT)
Finally, the last of the stocks you can buy but Warren Buffett cannot is the regional airline Allegiant Travel. Though a notable bear on airline stocks for many years, Buffett came around to the industry in the 21st century, and Berkshire now owns huge chunks of the four largest U.S. airlines: Delta Air Lines (DAL), Southwest Airlines (LUV), United Airlines (UAL), and American Airlines (AAL). Allegiant is much smaller; at $2.4 billion it's 20% the size of the smallest major airline. Importantly, its metrics are attractive, with a P/E of 13, forward P/E of 9.8 and PEG ratio of 0.6. A modest 1.9% dividend doesn't hurt either, and in the constantly consolidating airline industry, it's not farfetched that ALGT could be acquired.