Looking for blockbuster growth? I’d look outside the FTSE 100 and buy Warren Buffett’s top stock
If you’re looking for big long-term gains from exciting growth stocks, it can often pay to look outside the FTSE 100 and focus on smaller companies, or international entities.
Today, I want to highlight one international stock that I believe warrants attention from UK growth investors right now. For those with a long-term investment horizon, I think this company could deliver spectacular gains.
Buffett’s top holding
The international company I’m referring to is Apple (NASDAQ: AAPL), which requires little introduction. With a $918bn market-cap, the iPhone maker is currently the largest company in the world. It’s also the largest holding in Warren Buffett’s portfolio, with the ‘Oracle of Omaha’ holding nearly $50bn worth of Apple stock. Buffett stated earlier this year that he would own 100% of Apple stock if he could. So clearly, he’s bullish on the company.
Growth
Looking at Apple’s financials, it’s not hard to see why Buffett likes the stock. For example, over the last five years, revenue has grown from $171bn to $266bn (CAGR: 9.2%), and net income has surged from $37bn to $60bn (CAGR: 10.2%). These are excellent numbers for a company of Apple’s size. Furthermore, the company generates an outstanding return on equity (five-year average: 40.8%) and has increased its dividend significantly in recent years.
Economic moat
But it’s not just Apple’s financials that stand out. It’s well known that Buffett likes a strong ‘economic moat’, and Apple is a classic example of a company with just that. Not only is its brand highly regarded, but the company’s ecosystem (how its products work so well together) generates incredible customer loyalty. Buffett has stated that one of the key reasons he invested in Apple is because of “the value of their ecosystem and how permanent that ecosystem could be.”
It’s also worth noting that Apple’s revenue stream is becoming increasingly more diversified, meaning that the stock isn’t just a play on iPhone sales anymore. In the most recent quarter, revenue in its services category (iTunes, the App Store, Apple Music, iCloud, Apple Pay) jumped 27% to reach a new all-time high of $10bn. This is a growth driver going forward.
Buying opportunity
Despite Apple’s strong long-term growth prospects, the stock has pulled back recently, along with the rest of the US market. Investors also dumped the stock after Q4 results, as iPhone sales missed forecasts.
Yet for long-term investors, I think this share price weakness could be an opportunity. Like Buffett, I’m not too fussed about the exact number of iPhone sales every quarter. Instead, the story is more about how reliant people are on them and the power of the ecosystem over the next decade.
Looking at the stock’s valuation, Apple’s P/E ratio currently looks very reasonable, to my mind. With earnings per share of $13.50 expected for this financial year, the stock’s forward-looking P/E is just 14.3, which doesn’t seem expensive at all, given the company’s growth prospects.
Currency risk
Of course, UK investors need to be aware that owning international shares introduces currency risk. In other words, if the pound was to strengthen against the US dollar after purchasing the shares, this would erode some gains. Yet if you’re a long-term investor, I wouldn’t let that put you off. I, like Buffett, think Apple shares have huge potential over the long run.
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Edward Sheldon owns shares in Apple. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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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