I think I’ve found a stock to buy that ticks all the boxes for a Warren Buffett type of investment. It’s easy enough to understand, has a dominant market position, and trades at a decent price.
With £1,500 to invest, I’d be buying shares in Starbucks (NASDAQ:SBUX). I think that it would make a great addition to my portfolio right now.
Predictability
Buffett’s investment style involves looking for predictable business that will do well over time. It isn’t about trying to find stock that will double or triple within the next year.
Starbucks is exactly this type of company. With a dominant market position, growth is more likely to come steadily, rather than spectacularly.
In my view, growth at Starbucks is likely to be driven by three things. The first is increased coffee consumption.
The US coffee market is forecast to grow at around 6% annually for the next few years. Since Starbucks has a dominant position in the US, I expect its sales and profits to benefit.
Second, I expect the company to open new outlets, boosting its income. Buffett says that it’s best if a company doesn’t have to spend much cash to grow and I think this applies here.
Compared to other restaurants, Starbucks has relatively low costs associated with opening stores. This is because its outlets don’t need full kitchens and so have lower equipment costs.
Third, Starbucks has been buying back its own stock. As the number of shares decreases, the amount of the overall company’s earnings attributable to each share goes up.
Buffett has been effusive in his praise of Apple repurchasing shares. And over the last five years, Starbucks has reduced its share count from 1.47bn to 1.15bn.
The company paused its buyback programme earlier this year to invest in growth opportunities. But over time, I expect the number of Starbucks shares outstanding to decline.
Diversification
If I were investing £1,500 today, I’d be happy to invest it in Starbucks shares. I think that the stock has the hallmarks of a great Warren Buffett investment.
There’s a degree of risk that comes with investing the full £1,500 into a single stock. If I’ve misjudged the business, then I stand to see all of my investment underperform.
Importantly, though, I already have a fairly diversified set of investments. Buying £1,500 worth of stock in Starbucks would make the company around 2% of my portfolio.
I’m also invested in businesses like Aviva, Meta Platforms, and Southern Copper. As a result, adding Starbucks shares doesn’t leave me over-exposed to any particular region or sector.
If I didn’t already have other investments, I would be looking to invest part of the money and invest the rest elsewhere. But I don’t think 2% of my portfolio is excessive.
I’d therefore look to add Starbucks shares to my already diversified portfolio. I think it makes a lot of sense as someone looking to use the Warren Buffett method.