This week, investors get to find out what Warren Buffett – or more specifically his investment vehicle Berkshire Hathaway – has been up to. Or at least, what they were buying and selling at the end of last year.
However, the firm only has to disclose its US equities. With that in mind, I asked ChatGPT for some UK stocks that the Oracle of Omaha want to look at – and it had some interesting ideas.
5 UK stocks
The names it suggested are:
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Of course, there’s no suggestion Mr B is actually buying them, this is just ChatGPT musing. But these are interesting ideas, although I think some are clearly non-starters. In 2022, Todd Combs – one of Berkshire Hathaway’s managers – set out three criteria Buffett uses in finding stock investments.
One is trading at a forward price-to-earnings (P/E) ratio below 15. A second is having a 90% chance of making more money five years from now, and a third is a 50% chance of growing at 7% a year.
Auto Trader, Games Workshop and Unilever look like terrific businesses to me, but they clearly don’t meet the first condition at the moment. So they’re out, leaving Diageo and Reckitt.
Growth
I think both Diageo and Reckitt have a decent chance of meeting Buffett’s second condition. The chanes of them making more money five years from now looks pretty high in each case.
While Diageo’s latest trading results show a 1% decline in revenues, this is partly due to unfavourable foreign exchange rates. Adjusting for these, the firm’s starting to emerge from a challenging period.
The big threat at the moment is the possibility of tariffs weighing on its US sales and profits. And investors need to consider whether these are a long-term threat or a temporary negotiating tactic.
With Reckitt, I think the company’s strong brands are a very important asset. These give it a strong position in emerging markets where demographic trends are relatively favourable.
Compounding
The last condition is having a 50% chance of growing at 7%. This one’s a little complicated with Diageo – until recently the firm was guiding for medium-term revenue growth of 5-7%.
Management has withdrawn this due to uncertainty around tariffs. But investors should also consider whether other potential threats – such as the rise of appetite-suppressing GLP-1 drugs – could also limit future growth.
With Reckitt, things are a little different. Its most powerful brands have been growing at 7% a year since 2018 and the company’s looking to divest some of its weaker divisions to focus on these.
The biggest ongoing threat is legal liabilities (and not just in its infant formula division). The firm’s had to deal with several differing sets of international regulations and standards and this is a source of risk.
Could Buffett be interested?
As I see it, both Diageo and Reckitt look borderline cases in terms of meeting Buffett’s criteria. Whether anyone at Berkshire Hathaway has any interest in them however’s another question.
Investors aren’t likely to find out the answer to these questions this week. But I’m always interested in what unusually talented investors are doing and I’ll be paying close attention over the next few days.
