Stocks too small for Buffett’s radar

When investment giants like Warren Buffett seize the rare opportunity to buy a valuable stock, they more often than not pass up the opportunity. Because they manage such large amounts of capital, investing less than a few billion in companies isn’t large enough to bring them any returns.

For this reason, these giants overlook many worthy titles. The retail investor has an advantage in stocks like Best Buy Co. NYSE:BBY, Crocs Inc. NASDAQ:CROXand even Mueller Industries Inc. New York Stock Exchange: MLI. These companies share some of the characteristics these value investors look for. However, they are all under the $20 billion capitalization benchmark.

Each of these stocks has the kind of profitability around it that would otherwise earn it a place Berkshire Hathaway Inc. NYSE: BRK.A. However, due to their size, these are companies to which they would have to transfer significant funds. Some people on Wall Street don’t have this problem, particularly analysts.

Mueller Industries: profit from steel

The Federal Reserve (Fed) is looking to cut interest rates this year. However, the extent and timing of these cuts are still uncertain. Investors can follow the FedWatch tool on CME Group Inc. NASDAQ: ECMwhere traders have priced in these cuts as early as May or June 2024.

Analysts at The Goldman Sachs Group Inc. NYSE:GS I think the US manufacturing sector could see a turnaround later in the year. Of course, this belief – expressed in their 2024 macroeconomic outlook report – is supported by the same potential for interest rate cuts to boost economic activity.

Regarding the ISM manufacturing PMI, the primary metals and fabricated metals industries recorded their first expansion in February, following contraction in the previous two months. So far Goldman is right in this manufacturing expansion, but why Mueller?

The stock’s return on invested capital (ROIC) is something that all Buffett stocks have. Over the past five years, Mueller’s financial data shows an average ROIC rate above 22%. This compares to another of Buffett’s holdings, Visa Inc. NYSE:Vwhich also has an average ROIC of 23% over the last five years.

While the stock’s $6 billion market cap makes it difficult for Buffett to buy, other institutions like it PNC Financial Services Group Inc. NYSE:PNC and Vanguard Group bought the stock in the last quarter.

Crocs are still in fashion

Gross margins can tell investors a lot about a company, such as Crocs’ 55% and higher gross margin in its financials. When a company manages to achieve such a high rate of profitability, it typically means that the underlying product or service has pricing power attached to it.

Crocs has always had good brand penetration, which may be the source of these high gross margins and pricing power. On top of that, the company generates an average ROIC of 20% when considering financial data over the last five years.

Despite trading at 95% of its 52-week high price, Crocs still trades at a 74% discount to the footwear sector. Investors can follow this discount into the stock’s 11x P/E valuation versus the industry’s 43x average valuation multiple.

Knowing that the stock is discounted and that its financials can help investors continue to increase their investment capital, analysts at Bank of America Co. NYSE:BAC they raised their price targets on Crocs stock to $150 per share. The stock needs to rally 5% from where it trades today to prove these predictions correct.

Goldman Sachs believes it could rise slightly, as the group increased its position in the stock by 46.7% in the last quarter. This transaction would represent a $33.6 million purchase.

Best Buy alive and well

Analysts at JP Morgan Chase & Co. New York Stock Exchange: JPM think Best Buy stock could go as high as $101 per share, as it assigned an “overweight” rating in March 2024; their current ratings say the stock could rise as much as 22% from today’s prices.

Some investors argue that Best Buy has no added value compared to Amazon.com Inc. NASDAQ: AMZN. While Best Buy doesn’t have Amazon’s network and scale, it has niche expertise in consumer electronics.

Management’s efficiency in turning the ship around, in plans such as store redesigns for distribution hubs, inventory management, and optimization in mergers and acquisitions (M&A) departments, can be measured in ROIC. Over the past five years, Best Buy’s financials show an average ROIC of 17%, higher than Amazon’s average of 5%.

A gross margin of 22% suggests Best Buy’s business model is still alive today, and trading at 95% of its 52-week high shows how investors feel comfortable filling the name with momentum.

Before you consider Amazon.com, you’ll want to hear this.

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