Interactive Investor

Pros name five UK shares Warren Buffett might put in his ISA

Sam Benstead looks at how the Sage of Omaha’s investment process can be applied to UK shares.

19th March 2024 09:20

by Sam Benstead from interactive investor

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Warren Buffett has proven over a 70-year career that he is a master stock picker. He started out buying cheap “value” shares but pivoted to focusing on established “quality” companies, such as  Coca-Cola and American Express

He looks to buy what he calls “wonderful” businesses that are underpriced. No investment represents this better than buying Apple Inc (NASDAQ:AAPL) in 2016 when its shares were under pressure, trading at just 11 times earnings. They now trade at nearly 30 times earnings and shares have gone from trading at about $25 to around $170 now.  

So, what UK shares might Buffett be drawn to today? We asked fund managers who admire his investment style to give stock ideas that Buffett might tuck away in his ISA.  

Diageo 

Warren Buffett’s holding company Berkshire Hathway invests in FTSE 100 alcoholic drinks giant Diageo, and now owns about 2% of the firm. 

Nick Train, manager of Lindsell Train UK Equity fund, who is also an investor in Diageo, says that this tells us something about the investment case for Diageo. 

Train says: “As regards the debate about Diageo’s investment value, we note Berkshire Hathaway has reaffirmed its enthusiasm for the company, by adding to its stake.  

“Its problems in Latin America are easing. And the advantaged position it enjoys in whisky, tequila and stout (all secular growth categories, although Guinness is effectively its own category) looks as promising as ever.” 

David Beggs, investment analyst at Sanford DeLand, which runs the CFP SDL UK Buffettology fund, also says Diageo fits Warren Buffett’s strict investment criteria.  

Beggs says this is because it owns world-leading brands, including Guinness (established in 1759) and Johnnie Walker (which traces back to 1820). 

“These brands have withstood the test of time, surviving two world wars and prohibition. One can be reasonably confident that people will still be drinking these beloved brands decades into the future,” Beggs said.  

Moonpig 

Online card retailer Moonpig’s market share of around 70% in its core markets of the UK and the Netherlands makes it a Buffett-like holding, according to Anthony Cross of Liontrust Asset Management.  

He says that central to Moonpig’s business proposition is the critical importance of data, using information provided voluntarily by Moonpig customers, such as card and gift recipients, relationships, occasions and preferences, to “augment and refine” the marketing proposition. 

Therefore, Cross says the company is continually strengthening and reinforcing its market leadership position. 

Cross’ investment process seeks to identify companies with enduring competitive advantage – what Buffett would call a “moat” - stemming from strength in intangible assets.  

He says there are three intangible assets in particular – intellectual property, strong distribution networks (either physical or embedded, data-driven networks) and high levels of recurring income – which are essential for inclusion in his portfolios.  

Rotork 

FTSE 250 firm Rotork designs and sells “flow control” products, such as valves and actuators. Cross says the company is built on an ethos of continual innovation, quality and reliability, with its products specified into “mission critical” applications in end markets such as oil and gas, water and wastewater, power, chemical and industrials, where the cost of failure is extremely high. 

Cross says: “Demand in many of these end markets is underpinned by the structural mega-trend of sustainability, and Rotork, with its market leadership positions globally, targets consistent mid-high single digit revenue growth over the medium term at strong mid-20s% operating profit margins.”  

Shares have risen around 10% over the past five years and the dividend yield is 2%.  

Gamma Communications 

Another Buffett-type pick from Cross, Gamma Communications is a provider of business-to-business communications solutions in the UK and Europe, such as internet-enabled telephone products and services. 

Cross says: “It has very high levels of recurring revenue (around 90% of turnover), underpinning a robust business model. With over half of businesses in Gamma’s UK and European markets yet to fully embrace cloud-based communications solutions, there is a clear long-term structural growth opportunity which remains ripe for the taking.” 

Data group Morningstar calculates that its operating profit margin is 13.5%. Shares are up 25% this year, but are still 45% below their late 2021 peak.  

Games Workshop

Games Workshop designs, manufactures and retails tabletop miniature war games set in fictional universes such as Warhammer 40,000 and Warhammer Age of Sigmar

Beggs says it fits Buffett's philosophy because the famous stock picker has often talked about looking for businesses that capture a piece of their customers’ mind: “There is perhaps no better example of that phenomenon than Games Workshop,” Beggs says.  

He adds: “The fanatical loyalty of the customer base gives the business great pricing power as the Warhammer intellectual property it owns is unique to Games Workshop. Financially this is reflected in profit margins well in excess of 30%.” 

Beggs also says the group is doing licensing deals for Warhammer, which will generate very high margin royalty income. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

Related Categories

    UK sharesISAsNorth AmericaFundsAIM & small cap sharesEurope

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