2 Warren Buffett Stocks to Buy Hand Over Fist and 1 to Avoid

The interesting thing about this list is that the two buys, Apple (NASDAQ: AAPL) and Pool Corp. (NASDAQ: POOL), have markedly higher valuations than the sell, Kraft Heinz (NASDAQ: KHC). The rationale behind the investment case for the first two lies in their long-term growth prospects -- something not shared by Kraft Heinz. Here's why.

Kraft Heinz is a challenged business

The consumer staples company generates 44% of its sales from condiments, sauces, dressings, and spreads, with 18% coming from easy-to-prepare meals. None of its other food categories (snacks, desserts, hydration products, coffee, cheese, and meats) contributes more than 10% of its sales.

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Image source: Getty Images.

It's a fast-changing industry subject to changes in consumer preferences, with substantial competition from retailers with their own branded or private-label products. This increasing competition has pressured Kraft's ability to generate revenue growth or margin expansion over the last decade.

As such, the company's return on capital employed (ROCE) lags that of its peer group. ROCE measures how much profit the company generates from its debt and equity. A consistently low ROCE implies that the company can do little to improve profitability by raising equity or issuing debt.

In short, based on current trends, it's a mature low-growth company facing ROCE challenges with a management hamstrung to initiate substantive changes by paying 61% of expected earnings in dividends.

KHC Return on Capital Employed data by YCharts.

Pool Corp., maintaining swimming pools

Continuing the theme of looking at operational metrics like profit margins, revenue growth, and ROCE, a cursory look at the medium-term trends for Pool Corp., a distributor of swimming pool supplies and equipment, suggests problems similar to those of Kraft Heinz.

That said, context counts for a lot, and investors need to recall that companies like Pool Corp. enjoyed an artificial boom during the pandemic lockdown.

Image source: Getty images.

The lockdowns encouraged spending on stay-at-home activities and drove investment in new swimming pools. For example, around 96,000 new pools were built in the U.S. in 2020, jumping to about 120,000 in 2021, and then 98,000 in 2022. By 2024, that figure was down to 60,000, and management expects a similar figure this year.

But no matter the amount, every one of those new pools will help add to the installed base that the company can sell into. Considering that it generates almost two-thirds of its sales from the maintenance and minor repair of swimming pools, this creates a significant long-term growth opportunity once the natural correction from the pandemic boom is over.

POOL Operating Margin (TTM) data by YCharts; TTM = trailing 12 months.

Apple and service growth

Apple is on a growth trajectory, focusing on increasing sales of its high-margin services. Like Pool Corp., investors can think of Apple's various devices -- including iPhones, iPads, Macs, wearables, and myriad other devices -- as an installed base for it to sell services into.

It's a growth opportunity in revenue, margins, and cash flow. As you can see below, strong services growth has increased its share of overall revenue. And given services' higher margin profile (currently above 75% compared to almost 36% for products), it's pulling up Apple's overall profit margin.

Data source: Apple. Chart by author.

That increase in profitability is likely to continue improving as services growth continues at a double-digit pace. In fact, Apple now has over a billion paid subscriptions. This will generate ongoing recurring revenue, which will drop down into improved cash flow generation.

Moreover, if you are wondering, here's what Apple's ROCE looks like.

AAPL Return on Capital Employed data by YCharts

Wall Street analysts expect Apple's free cash flow (FCF) to grow from $109 billion in 2025 to $126 billion in 2026 and $139 billion in 2039, implying double-digit increases. Trading at 27 times estimated FCF in 2025, it is not a conventionally cheap stock, and many investors may want to wait for a better entry point. Still, its long-term prospects remain excellent, and it's likely to grow into its valuation in the coming years.

Stocks to buy and sell

The key point is that Pool Corp. and Apple have a pathway to growth via expansion of the installed base of swimming pools and Apple devices, while Kraft Heinz does not have such prospects. The difference shows up in their operating metrics and long-term growth prospects.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Campbell's and Kraft Heinz. The Motley Fool has a disclosure policy.