The Sage of Omaha likely doesn’t need assistance with stock selection, but he might find this stock appealing.
Does Warren Buffett really need advice on picking stocks? Certainly not; he has successfully navigated this task on his own for decades.
The iconic investor might argue that he considers himself more of a “business picker” than simply a stock picker. Additionally, he has delegated some of his decision-making to investment managers Todd Combs and Ted Weschler over the years.
However, if Buffett were to hypothetically seek my recommendation for a stock to add to Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) portfolio, I would suggest The Home Depot (HD -0.04%).
Image source: The Home Depot.
Why Home Depot is a Strong Choice for Buffett
I consider Home Depot an excellent choice for Buffett partly because it has been in his portfolio before. He initially invested in the home improvement leader two decades ago but completely divested Berkshire’s holdings in the second quarter of 2009.
In hindsight, Buffett might regret not keeping those shares. Since he sold, Home Depot’s stock has surged approximately 1,570%—more than double Berkshire Hathaway’s own gains during that period. Including reinvested dividends, Home Depot’s total return since Buffett exited is around 2,370%.
Buffett would probably appreciate Home Depot’s impressive operating margin of 13.1%. I believe he would be particularly impressed by the company’s return on invested capital (ROIC) of approximately 31.2%.
His familiarity with the business is a plus; Buffett has recently invested in companies that mirror some of Home Depot’s market trends, such as homebuilders D.R. Horton (NYSE: DHI) and Lennar (NYSE: LEN) (NYSE: LEN.B).
A Potential Concern
Is Home Depot without flaws? Not quite. One downside is its relatively high valuation. Its trailing 12-month price-to-earnings (P/E) ratio and forward P/E ratio are around 26. Buffett, influenced by the value investing principles of Benjamin Graham, may hesitate to pay such a premium for Home Depot, though it’s uncertain.
In the second quarter, Berkshire acquired 12 new stocks, several of which were considered bargains typical for Buffett’s style. Yet, two of these stocks had forward earnings multiples above Home Depot’s: Heico (NYSE: HEI) at 66.8 times forward earnings, and Pool Corp. (NASDAQ: POOL) at 28.7.
Is Home Depot Suitable for All Investors?
I chose Home Depot because it aligns well with Buffett’s investment philosophy. But is it an ideal choice for all investors? Probably not.
A strict value investor, which I don’t believe Buffett entirely represents, might quickly discount Home Depot for the previously mentioned reasons. Its 2.3% dividend yield may not attract income-seeking investors, nor can it compete with high-growth stocks.
Despite my belief in Home Depot as a good pick for Buffett, I don’t own it myself. While I appreciate the stock, I prefer others more. Plus, unlike Buffett, I don’t have a cash reserve of $344 billion.
Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, D.R. Horton, Home Depot, and Lennar. The Motley Fool recommends Heico. The Motley Fool has a disclosure policy.
