Warren Buffett is, arguably, the most revered investor of our generation. The "Oracle of Omaha," as he's come to be known over the years, turned seed capital of $10,000 in the mid-1950s into a net worth of more than $82 billion as of today. His company, (( Berkshire Hathaway NYSE:BRK-A) NYSE:BRK-B), which he's led as CEO for nearly 50 years, has also created more than $400 billion in value for shareholders over the years.
What's perhaps most interesting about Buffett is that his "secret" to success is no secret at all. Instead of jumping in and out of stocks and looking for quick hitters, Buffett seeks out businesses that offer clear competitive advantages and that trade at a discount. Most important, he tends to hold these investments for a long period. Core holdings, such as Coca-Cola and Wells Fargo, have been fixtures in Buffett's portfolio for more than 30 years.
But the big question on investors' minds is, "What will Buffett buy next?"
The Oracle of Omaha has been clear to shareholders that any purchase Berkshire Hathaway makes would need to be a so-called "needle mover." That's because, in addition to a $224 billion in investment holdings, Berkshire Hathaway has acquired roughly 60 companies during Buffett's tenure as CEO. Adding smaller businesses here and there simply doesn't move the needle.
Over the past 3.5 years, since purchasing Precision Castparts, Buffett has been oddly inactive on the acquisition front. This has allowed Berkshire's cash pile to grow to an all-time record of $122.4 billion. With Buffett having previously commented that $30 billon in where he'd like to see Berkshire's cash, this gives him and his team more than $90 billion in cash to go shopping.
In Februry 2018, I'd opined that ( NextEra Energy NYSE:NEE) was the no-brainer stock that Buffett should consider buying. At the time, NextEra was hitting the scales with a market cap of $73 billion, but it offered a slew of competitive advantages that Buffett should appreciate. Namely, it had more operating wind and solar generation than any other utility company in the United States. This should lead to lower long-term generation costs and significantly higher growth rates, relative to its peers.
NextEra also provides a basic-need service. No matter how well or poorly the U.S. economy is performing, consumers don't tend to change their electricity-consumption habits much, if at all. This creates the type of cash flow predictability that typically attracts value investors like Buffett.
But since my suggestion, NextEra's stock has soared. With a market cap of $116 billion, as of Oct. 24, it's become far less likely that Berkshire Hathaway would pull the trigger on the largest utility stock in the United States.
However, I have a new no-brainer stock lined up that I believe ( Buffett should consider buying right now -- and it's in a sector that the Oracle of Omaha typically avoids. Ladies and gentlemen, say hello to Intuitive Surgical NASDAQ:ISRG).
Traditionally, Buffett tends to distance himself from healthcare stocks. At no time since 2001 has healthcare comprised more than 6.98% of Berkshire's invested assets, and it currently accounts for a meager 1.26%. Buffett's avoidance of healthcare likely has to do with the fact that he doesn't have the time to devote to following up on clinical studies. Nevertheless, surgically assisted robotic-medical-device maker Intuitive Surgical offers so many long-tail advantages that Buffett would be foolish to look away.
As of the company's recently reported third-quarter operating results, it had 5,406 of its da Vinci Surgical System's installed worldwide. You could pretty much add up all of Intuitive Surgical's soft tissue robotic surgery competitors and you'd get nowhere near Intuitive's installed base, which has taken roughly two decades to build.
Not only would it be difficult from a financial perspective for the company's competitors to catch up to Intuitive Surgical's installed base of robotic surgical systems, but it would be doubly difficult given the rapport Intuitive Surgical has built within the medical community. The intangibles, including training provided to surgeons, makes it highly unlikely that existing da Vinci clients would switch to a competing platform.
Intuitive Surgical's revenue make-up is also a thing of beauty. As a relatively younger company, Intuitive Surgical generated the bulk of its sales from selling its da Vinci surgical system. However, despite being pricey systems ($0.5 million to $2.5 million), they're intricate and costly to produce. Thus, the margins on the da Vinci systems aren't all that impressive. But as the installed base grows, Intuitive's two other revenue segments begin to shine: instruments/accessories and services. Every procedure undertaken using the da Vinci system requires the use of new instruments, which is where the company generates the bulk of its margins. Further, these surgical systems will require regular servicing, which is another source of high-margin revenue. In the third quarter, these two high-margin sources of revenue accounted for 70% of the company's total sales. Thus, as the company's installed base grows, the company's margins should expand.
To build on this previous point, Intuitive Surgical's da Vinci system has enough options to offer global appeal. Sure, these systems are pricy, but with some systems priced at closer to $0.5 million, rather than $2 million to $2.5 million, the company has robotic surgical options available for emerging market economies.
Lastly, Intuitive Surgical has only scratched the tip of the iceberg in terms of soft tissue surgeries. Despite having significant market share in gynecology and urology surgeries, it's only now building up its share in colorectal and thoracic surgeries, and has a long-tail opportunity to grow in general soft tissue surgeries. Also, since we can't decide when we get sick or what ailment(s) we develop, this also means that the da Vinci system is pretty much recession-proof.
While Intuitive Surgical isn't exactly cheap at $63 billion in market cap and 39 times forward earnings, it has consistently topped Wall Street's expectations and offers a double-digit percentage growth opportunity for as far as the eye can see. It's one of the most logical needle-moving acquisitions Buffett can consider making.
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