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3 Stocks a Young Warren Buffett Would Buy

Warren Buffett, the famed billionaire investor and CEO of conglomerate Berkshire Hathaway, has always been a value investor. Buffett tries to estimate how much a stock is worth and buy it for less, with a margin of safety giving him room for error.

Buffett's style has evolved over the decades, but the core concept behind his approach has remained the same. Are there any stocks out there today that a young Warren Buffett would pounce on? Three of our Foolish investors think Axon Enterprise (NASDAQ: AAXN), Foot Locker (NYSE: FL), and General Electric (NYSE: GE) would be right up Buffett's alley.

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A hardware business built on the cloud

Travis Hoium (Axon Enterprise): Warren Buffett loves investments that have a competitive moat and a sticky business model, which is why a young Buffett would love Axon Enterprise. The company is the dominant supplier of Tasers and body cameras to law enforcement agencies around the world and is building a position that should be durable for years to come. 

Tasers are currently Axon's biggest business, accounting for two-thirds of sales in the second quarter of 2017. But the emerging business is body cameras, which saw an increase in revenue of 101% last quarter and has $446.1 million of future contracted revenue. Most of that revenue is for cloud storage contracts and other services that run years into the future. 

What Axon wants to do is get everyone in the law enforcement system tied into its network. Officers, prosecutors, administrators, and even the public can be users of Axon's evidence.com platform. Once they're using the system, it'll be difficult to leave it, meaning Axon can generate recurring revenue for years, or even decades, from each customer. 

Axon isn't terribly profitable yet, generating just $17 million in net income over the past year. But it's investing in growing sales around the world, particularly in body cameras, where service margins can be in excess of 70%. This is a company with a big moat in supplying law enforcement with tasers and body cameras and should have a highly profitable business long-term, something Buffett would love.

An old-school Buffett stock

Tim Green (Foot Locker): One famous Warren Buffett quote goes like this: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Buying shares of mediocre companies solely because of knocked-down prices isn't Buffett's game.

But this wasn't always Buffett's style. In Buffett's early days, the Oracle of Omaha adhered to the cigar-butt style of value investing, buying shares of not-so-great companies for far less than they seemed to be worth. The strategy worked, but Berkshire would have never grown to be a $460 billion behemoth had Buffett not shifted his focus to high-quality companies.

Today, Buffett would probably never consider a beaten-down retailer like Foot Locker. The footwear seller faces an existential threat from e-commerce, not only from companies such as Amazon.com encroaching on its turf, but also from suppliers such as Nike that are shifting toward a direct-to-consumer business model. Foot Locker's recent results haven't done much to convince investors that its capable of turning itself around. But a young Buffett would have found plenty to like.

Over the past 12 months, Foot Locker has generated $577 million of net income. That puts the price-to-earnings ratio at just 6.5. If you back out the net cash on the balance sheet, which totaled a bit more than $900 million at the end of the second quarter, the P/E ratio falls to a miserly 4.9.

There are plenty of reasons to avoid Foot Locker despite the shockingly low valuation. But I think in his younger days, Buffett would have given the stock some serious thought.

Pounce on opportunity when it presents itself

Dan Caplinger (General Electric): When Warren Buffett was young, he made an investment in a well-established financial giant that had come on hard times. Facing controversy, the stock of what would eventually become one of the premier card and payment networks in the world fell on hard times, and Buffett wasn't afraid to pounce on the opportunity. Within just a few years, the stock had recovered, earning Buffett a big profit.

If anything, General Electric has even more blue-chip clout than the stock that the young Buffett actually bought more than half a century ago. Yet GE is facing some of the same existential issues, including doubts about its long-term strategy and cyclical downturns in some of its key business segments. Having made an about-face from its financial services business in the aftermath of the financial crisis, General Electric returned to its industrial roots and found success there for quite a while. Ill-timed expansion in the oilfield services business created challenges for GE, and the company has remained mired in industries with deteriorating fundamentals.

Some see General Electric as risky. Yet even with fears of a dividend cut and ongoing weakness in key parts of its business, GE's valuation has fallen so far that it gives investors a much wider margin of safety than they've typically enjoyed. Restructuring efforts will take time, and GE will struggle to find a new strategic direction. In the long run, though, General Electric has the ability to do just as well as the stock that young Buffett bought in the 1960s.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dan Caplinger owns shares of Berkshire Hathaway (B shares). Timothy Green owns shares of Berkshire Hathaway (B shares). Travis Hoium owns shares of Axon Enterprise, Berkshire Hathaway (B shares), and General Electric. The Motley Fool owns shares of and recommends Amazon, Axon Enterprise, Berkshire Hathaway (B shares), and Nike. The Motley Fool has a disclosure policy.