Warren Buffett Bought These 2 Stocks. Should You?

These new additions to Berkshire Hathaway’s portfolio are solid companies with economic moats. But only one of the stocks is undervalued today.

00:00 Introduction
00:25 Heico HEI
01:28 Ulta Beauty ULTA



Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Warren Buffett’s Berkshire Hathaway BRK.A BRK.B recently released its latest 13-F, which revealed which stocks the firm bought and sold during the second quarter.



Although Berkshire was a big seller of stocks during the period, Buffett did take positions in two new names: Heico HEI and Ulta Beauty ULTA. Let’s look at both companies and find out if either stock is a buy today according to Morningstar’s metrics.



We’ll start with Heico. Heico is an aerospace and defense supplier focused on creating niche replacement parts for commercial aircraft and components for defense products. Morningstar thinks Heico has carved out a narrow economic moat through two moat sources. First Heico possesses intangible assets that come from the complexity of its products and the strict regulatory environment in which it operates. And second, the company benefits from high switching costs stemming from the importance of its parts operating correctly and their placement on long-cycle products. We expect Heico to remain competitive for at least the next decade. The company is in a sound financial position, typically carries little debt, and generates significant free cash flow. And we expect Heico to achieve a 12.5% compound annual growth rate through 2028. So is the stock a buy? Morningstar thinks Heico stock is worth $173 and shares trade well above that; in other words, the stock looks very overvalued to us today.



Then there’s Ulta Beauty. Ulta is the largest specialized beauty retailer in the United States. Morningstar thinks Ulta has carved out a narrow economic moat based on its brand strength. Strong branding has allowed the company to thrive despite economic conditions and external challenges, and we expect Ulta to remain competitive for a decade or more. Given that it has stores in all major U.S. markets, Ulta’s high-growth phase may be over. But it continues to open new stores in the U.S. and abroad, its expanding its ecommerce business and it’s building out shops within Target TGT locations. As a result, we believe Ulta can continue to attract new customers and increase its share of customers’ annual beauty spending. How about Ulta, then – is this stock a buy? It's not a screaming buy, but Ulta stock is trading a bit below Morningstar’s $405 fair value estimate. Ulta is certainly the more attractive stock of Buffett's two buys.





Morningstar senior analyst David Swartz and analyst Nicolas Owens provided the research behind this segment.



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