With Berkshire Hathaway's (NYSE:BRK.A) annual report in hand and the recent deal for Lubrizol (NYSE:LZ) still in the news, there is once again a fair bit of interest in speculating on what sorts of companies Warren Buffett would (or does) like. Though specific predictions of Mr. Buffett's moves are more often wrong, there are a handful of non-bank financial services stocks that investors may want to consider with an eye towards their franchise value and difficult-to-replace market niches. (For more, see Emulate Buffett For Fun And Profit - Mostly Profit.)

Making Payroll Services Pay
Automatic Data Processing (NYSE:ADP) and Paychex (Nasdaq:PAYX) do more than just handle payroll (for large and smaller companies, respectively), but that is their signature business lines. There is a lot here that an investor seeking to emulate Warren Buffett should find attractive. (For more, see Buffett Picks To Coattail.).

This is a recurrent fee-collecting business; people get paid on a regular schedule and these companies can collect a small fee every time they do. It is also a bet on the recovery and prosperity of the country; more jobs means more payroll and more demand for payroll services (and Buffett is a noted optimist on the long-term prospects of the U.S. economy). Last and certainly not least, each company produces a "float" of money, money paid to the companies for payroll but not yet disbursed to employees, that can be profitably invested.

Title Insurance: A New Play on a Familiar Theme
Most Buffett-watchers are aware of the significant role that insurance operations have had in building Berkshire Hathaway into what it is today. Although the company has not been quite so active in acquiring insurance companies in recent years, title insurance could be an attractive opportunity.

Title insurance basically shields home owners and lenders from the risk that a piece of property does not have a clean and proper title; said differently, title insurance serves as a backup to insure that the title is accurate and the owner has access to the property (and that the lender has a valid claim in the cause of default). (For more, see 10 Hurdles To Closing On A New Home.)

Unlike property and casualty (P&C) insurance or reinsurance, where claims are routine and expected, title insurance companies typically only pay out a small portion of their premiums as claims. Or at least that was how the business used to operate, before the greed, sloppiness, and dishonesty of the housing bubble created problems throughout the system.

Like many businesses tied into housing and mortgage lending, title insurance is a business that is getting better but still ailing. Leading title insurance companies like Fidelity National (NYSE:FNF), Old Republic (NYSE:ORI) and First American (NYSE:FAF) all trade below book value today (accounting book, not tangible book), while typically trading at about a 20% premium to book value in more normal times.

Tutorial: Intro To Insurance

Information Is Power
Warren Buffett famously likes businesses that have built a monopoly or near-monopoly through the quality and significance of their products and services. In terms of financial information services, Factset (NYSE:FDS) and Bloomberg come to mind as premier providers of expensive subscription-based services. It is hard to call Factset cheap on its fundamentals (and Bloomberg is a private business), but it produces ample recurrent cashflow and its customers tend to be quite sticky. What's more, Factset is still actually quite small and has many potential avenues for organic growth and expansion.

Bottom Line
Apart from the title insurers, none of these stocks may pop out as "Buffett-cheap." That said, commentators about Buffett's investment strategy often grossly over-simplify and misunderstand his approach to value and valuation (as seen by the howling and second-guessing of his Burlington Northern buy a while ago). To put a finer point on it, Mr. Buffett has never shown himself to be willing to be tied down to notions like P/E or EV/EBITDA when approaching the value of a business; the quality of the assets also matter and businesses that offer near-monopolies or low cost of capital are often worth more than simple ratios suggest.

Investors should not buy any of these stocks on the idea that Berkshire Hathaway will acquire them. Consider buying them instead for their own inherent qualities - qualities that Buffett has said he admires and that often produce years of value for patient investors. (For more, see 4 Lesser-Known Companies Buffett Owns and Buffett Brings Lubrizol Into The Fold).

Related Articles
  1. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  3. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  4. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  5. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  6. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  7. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  8. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  9. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  10. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center