2 FTSE 100 stocks I’d buy using the Warren Buffett method

Christopher Ruane applies Warren Buffett’s method to pick a couple of UK shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett is famous for his outstanding track record in investing, By learning his simple approach to assessing shares, investors hope to be able to improve their own success rate in the stock market.

Below I explain one key thing Buffett looks for when assessing companies, and then identify a couple of leading FTSE 100 shares I’d buy using that method.

A moat helps keep protect a company’s business

In olden times, castles had moats to help repel attackers. It took more effort to attack a castle surrounded by a muddy pool of water. That reduced the chance that a building with a moat would be overrun by enemy soldiers.

The same is true for companies. That is why Buffett tries to choose businesses with a commercial “moat” – something which makes it harder for competitors to move into the same business space. For example, Buffett has a big holding in Coca Cola, whose unique formulation provides a protective moat. Similarly, he holds American Express, whose brand and service network is impossible for competitors to replicate.

Special recipes and brand names

Some leading British companies are attractive to me precisely because they have the sort of moat that appeals to Buffett.

One example is Diageo (LSE: DGE). Like Coca Cola, this drinks company has a lot of proprietary drinks recipes, such as its Johnnie Walker whisky blends and Guinness beer brand. These are impossible for competitors to replicate exactly.

In an age of globalised drinks brands, the company’s extensive distribution network further widens its moat. Diageo already sells into bars and restaurants, so the cost of adding in extra drinks brands is minimal. But for a single distillery or brewery with a limited range, getting distribution in new outlets could be cripplingly expensive.

Diageo clearly recognizes the advantage this portfolio strategy gives it. That is why it continues to acquire brands, such as its recent purchase of gin distiller Chase. Its shares have started to pick up again, but I would still buy Diageo for its moat.

Distribution networks

A lesser known company I would also buy for the sort of moat Warren Buffett discusses is the logistics specialist DCC (LSE: DCC). Like Diageo, one element of its business moat is a distribution network. The company operates oil and gas retail networks throughout Europe and North America. In many areas, there is a stable repeat customer base for products like liquid propane gas (LPG).

The costs to entry to set up a competing network are simply too high to be economically viable. While there are concerns about the sustainability of oil markets for cars, I don’t worry about LPG in rural areas and for industrial uses. I expect LPG to continue in use for decades. That moat is one reason why DCC has such strong business results, year after year. DCC may not be as well-known as Diageo, but both companies have raised their dividend every year for more than a quarter of a century.

I find Buffett’s simple principles for successful stock picking helpful partly because they are so easy to understand and apply. Using this method, I’d buy Diageo and DCC today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

chris231 has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »