Warren Buffett has demanding criteria when he looks for stocks to buy. Here’s one that I think fits the bill, even though it doesn’t get much media coverage.
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Warren Buffett is one of the most successful investors of all time. The Berkshire Hathaway CEO specialises in making investments in companies that have very specific features.
First is a quality business. Buffett defines this as the ability to generate significant amounts of cash without requiring substantial reinvestment.
Second is an economic moat. This is a competitive advantage that allows the company to maintain and grow its share of the market.
Third is an attractive share price. When Buffett invests in a stock, he looks for a business that has a low share price compared to the cash it can generate in the future.
I think that Landstar System (NASDAQ:LSTR) fits the bill here. It isn’t a stock that gets much attention, but it looks to me like it fits Buffett’s famous criteria.
First things first, what does Landstar do? The company is a trucking company that essentially acts as a brokerage service.
Landstar owns a fleet of trailers. It contracts hauling jobs to independent vehicle owners, who sign up to be part of the company’s network.
Not owning the vehicles themselves means that Landstar doesn’t have maintenance costs associated with them. This helps keep its costs down.
As a result, the company has some impressive financial metrics. Landstar generates around $593m in operating income with just $317m in fixed assets — a return of around 187%.
Due to the business having low capital requirements, approximately 79% of that operating income becomes free cash. This makes Landstar a quality company by Buffett’s standards.
Landstar’s business is protected by the kind of economic moat that Buffett looks for in finding companies to invest in. Its business is protected by a network effect.
The company’s large customer base of shipping organisations makes it attractive for truckers to become part of Landstar’s network. And the reverse is also true.
Having a large group of truckers available makes Landstar attractive to shippers looking to transport goods. In other words, having more truckers attracts more customers.
The size of Landstar’s network gives it an advantage over competitors that is very difficult to overcome. This provides the economic moat that Buffett looks for in an investment.
Lastly, I think that Landstar shares are currently trading at a decent price. The stock is priced at a price-to-earnings (P/E) ratio of around 14.
I think that’s a good price. The company has a strong balance sheet, with more cash than debt and currently provides a free cash return of over 7%.
There is a danger that business might slow down in a recession. But I think that the company only needs to average its current cash return over time to look attractive at today’s price.
Landstar System is a company that doesn’t tend to get much coverage. But I think that it could be a great addition to my portfolio.
As I see it, the stock has all the properties that Buffett looks for in an investment. It’s a quality business, hasa strong competitive advantage, and trades at a good price.
I’m therefore looking to add this stock to my investment portfolio in December.
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.
Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has no position in any of the shares mentioned. 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.
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