Buffett's problem is that Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is too big to take advantage of many of the opportunities in the stock market. This isn't a new problem for Buffett, either. He told investors in his 1995 letter to shareholders, "The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas."
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It's only gotten worse in the last 30 years, as Buffett manages over $600 billion in investable assets for Berkshire Hathaway. (That was just $26 billion in 1995.) Last year Buffett noted, "There remain only a handful of companies in this country capable of truly moving the needle at Berkshire."
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Unfortunately for Buffett, a lot of the best opportunities are found among smaller companies. That's reflected in Buffett's portfolio moves over the last two years. He's sold tens of millions of dollars' worth of the biggest stocks in the market. Meanwhile, his purchases have been small and mostly confined to smaller companies with market caps between $15 billion and $50 billion.
But investors have plenty of opportunities to buy stocks in promising companies currently worth far less than the smallest companies Buffett can reasonably buy for Berkshire's portfolio. Here are three great stocks to consider.
1. Dutch Bros
Dutch Bros(NYSE: BROS) is a coffee chain that seems built to take advantage of consumer behavior in the 2020s. The drive-thru-only cafes are designed to put out as many caffeinated beverages as possible during rush hour. Perhaps the biggest indicator that it's onto something is the shift in Starbucks to focus on faster service and redesigning its stores for more pick-up orders instead of its traditional "third place" cafes.
But Dutch Bros is still in the early days of its growth, and it's pulling multiple levers to expand the business.
First, its loyalty program is seeing great success. Dutch Rewards members accounted for 71% of sales in the fourth quarter, up 5 percentage points year over year. Strong adoption of the rewards program and mobile app is also fueling mobile ordering, which is now available in 96% of stores. Overall, it's driving higher repeat purchasers and more efficient service.
Second, Dutch Bros is rapidly opening new locations. The company ended 2024 with 982 shops, up 18% year over year, but it plans to more than double that number by 2029. What's more, it expects to be able to build more efficiently going forward, bringing capital expenditures per unit down from $1.7 million last year to $1.25 million in the future. Management expects the payback period on those stores to be just over two years.
Finally, Dutch Bros has opportunities to grow its ticket size by expanding its menu with food items. There's a careful balancing act here, though. Too many items could reduce efficiency and throughput, leading to long lines and customers leaving without ordering. The right options, however, could attract more customers and push them to order more, reaccelerating same-store sales growth.
While the company is only worth about $7 billion, Dutch Bros stock isn't exactly cheap. It trades for an enterprise value-to-EBITDA ratio of 27 based on analysts' forward expectations as of this writing. But with a long runway of profitable growth ahead of it, it could be well worth the price for investors.
2. Roku
Roku(NASDAQ: ROKU) provides the most-used connected-TV operating system in the United States. As streaming becomes the primary way to consume entertainment in the living room, Roku has seen strong adoption and engagement growth. As of the end of 2024, it counted nearly 90 million households streaming over 4 hours per day on its platform.
While the company is best known for its streaming sticks and branded television sets, its real moneymaker is in advertising. Roku generates revenue from advertisements on its home screen, ads in its owned free ad-supported television app the Roku Channel, and negotiated ad shares in other streaming apps.
As the leading TV operating system, Roku has gained leverage over media companies when it comes to negotiating distribution deals. That gives it more favorable terms in advertising commitments and revenue share, supporting a strong gross margin for the platform business.
Roku still has a lot of potential growth ahead of it. Its international expansions to Canada and Mexico have paid off with leading positions in both countries, but it still has room to grow in Europe and Latin America, where it's just started making inroads. Building relationships with TV manufacturers and retailers in those markets takes time, but it can succeed by following the same playbook that found it success in North America.
Roku stock currently trades for an enterprise value about 19 times analysts expectations for EBTIDA. That's a great value for the stock, which currently sports a market capitalization of $8.7 billion.
3. FuboTV
FuboTV(NYSE: FUBO) is a small virtual multichannel video programming distribution company that ended 2024 with 1.7 million subscribers. The company is focused heavily on live sports streaming, positioning its packages for sports fans looking to cut ties with traditional cable or satellite TV.
Fubo is significantly smaller than other competitors in the space like Walt Disney's Hulu + Live TV or YouTube TV. But it received a major shot in the arm in a proposed deal with Disney to fold its service into Hulu earlier this year. Under the terms of the deal, Disney will take a 70% controlling ownership stake in the business, but Fubo will remain an independent company.
But a close relationship with Disney could be a huge benefit for Fubo. First of all, it would be able to negotiate much better rates on the most expensive networks for a distributor, Disney's ESPN family. Those channels are particularly important for Fubo's sports-focused offering. Combining Fubo with Hulu + Live TV subscribers would also give it more negotiating power with other media companies. On top of that, Disney's 70% ownership stake would give it a vested interest in ensuring strong operating results for the business.
Even if the Disney deal doesn't go through, Fubo sits in a relatively strong position to grow going forward. If the deal fails, Fubo still receives $130 million from Disney. Fubo ended 2024 with just $161 million in cash on its balance sheet, but it did have its first quarter of positive free cash flow last year.
With a market cap of about $1 billion, Fubo's operations aren't being valued too highly at this point. If you add $130 million to its book value, the stock trades for just 3 times book value. If you add the full $220 million it's due if the Disney deal goes through the multiple falls to just 2.4. If it's able to maintain its positive free cash flow for the first quarter, that multiple might be even smaller. That makes it a small-cap stock worth taking a closer look at for many investors.
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Adam Levy has positions in Roku, Starbucks, and Walt Disney. The Motley Fool has positions in and recommends Berkshire Hathaway, Roku, Starbucks, Walt Disney, and fuboTV. The Motley Fool recommends Dutch Bros. The Motley Fool has a disclosure policy.
