The influence of Warren Buffett on Terry Smith’s Fundsmith is clear in its Owner’s Manual, which references Buffett and Berkshire Hathaway multiple times throughout its 17 pages.

Nicknamed “the English Warren Buffett,” Smith shares a similar investment philosophy. His strategy hinges on identifying “a good company with good products or services, strong market share, good profitability, cash flow, and product development.” This straightforward approach allows him to buy and hold exceptional companies.

Smith openly discusses the fund’s historic performance. The annual letter to shareholders prominently features its returns since inception in 2010. By 2024, Fundsmith has yielded 607.3% for investors, while the MSCI World Index only grew by 403.4%. Although this performance may not match Buffett’s long-term success with the S&P 500, it is still noteworthy as Fundsmith continues to expand.

Image source: Getty Images.

With a portfolio currently valued at $24 billion, Smith’s focus on high-quality companies has resulted in a concentrated investment strategy. Notably, just three companies make up 31% of the fund’s assets, all recognized for their exceptional performance.

1. Meta Platforms (11.25% of Assets)

Terry Smith acquired shares in Meta Platforms (NASDAQ: META) as far back as 2018 when the company was still known as Facebook. Despite being a somewhat divisive choice, Smith highlighted Meta’s impressive financial indicators: high margins, significant capital returns, and robust revenue growth. He also noted that even with its increased investments in research and development, the free cash flow continues to grow. Meta’s valuation has remained competitive, roughly in line with the S&P 500.

Since this initial investment, Meta has consistently ranked among the top five contributors to Fundsmith’s annual performance. The company’s recent quarter revealed a 16% increase in revenue along with an operating margin expansion to 41%. Although heavy spending on AI impacts free cash flow, Meta still generated over $10 billion in excess cash this past quarter.

Two significant competitive advantages support Meta’s ongoing growth. First, its scale is unmatched; over 3.4 billion unique users access its Family of Apps, making it an attractive platform for advertisers targeting various audiences.

Secondly, Meta’s advertising capabilities lead the industry, bolstered by substantial AI investments. Enhanced algorithms allow marketers to effectively reach their target audiences. Recent metrics show a 5% rise in ad impressions and a 10% increase in ad prices, indicating high engagement levels and advertisers’ willingness to invest. Meta stands out as one of the few companies with the resources to invest heavily in AI, providing it with a substantial competitive edge.

Despite its promising growth, Meta is still reasonably valued, with a forward price-to-earnings (P/E) ratio of 23, slightly above the S&P 500, but it boasts higher long-term earnings growth potential.

2. Microsoft (11.25%)

Smith’s stake in Microsoft (NASDAQ: MSFT) has also faced scrutiny since its inception in 2011. Smith initially purchased shares around $25 and has since reduced holdings by about half since early 2022. Nevertheless, Microsoft still represents over 11% of the portfolio.

Over the past 14 years, Microsoft has transformed into a leader in cloud computing and AI. Its Azure platform is among the top three public cloud services. Azure’s revenue saw a year-over-year increase of 33% in the last quarter.

AI has become a key growth driver for Microsoft. Azure’s AI services provide cutting-edge tools for businesses to develop AI applications, accounting for nearly half of Azure’s growth in the third quarter. Management indicated that demand is exceeding supply, pointing to continued robust growth in the upcoming quarters.

Microsoft has also made strides with its AI solutions under the Copilot brand. Products like GitHub Copilot and Sales Agent enhance productivity for businesses. Currently, 230,000 organizations, including 90% of the Fortune 500, utilize Copilot Studio. This focus on AI has resulted in double-digit growth within Microsoft’s enterprise software sector.

Though Microsoft’s stock might be viewed as costly with a forward P/E of 32.3, its strong free cash flow and share repurchase programs provide significant value for investors.

3. Stryker (8.5%)

Terry Smith’s investment in Stryker (NYSE: SYK) dates back to Fundsmith’s establishment and has been a major contributor to its performance. Smith often remarks on the notion that investing in high-quality businesses yields strong results.

Analyzing Stryker’s Growth Potential Amid Economic Concerns

Smith has consistently held a significant position in Stryker, leading to substantial gains. The stock has appreciated 666% since the inception of Fundsmith.

Recent Challenges for Stryker

However, Stryker faces recent challenges. Concerns about an economic slowdown may impact elective surgeries, alongside potential Medicaid cuts affecting patient access to procedures. Additionally, high import tariffs could adversely affect Stryker’s profit margins. In the first quarter earnings report, management addressed these issues, forecasting higher sales growth of 8.5% to 9.5% for the full year. They anticipate tariffs will negatively affect earnings by approximately $200 million this year, while guiding for adjusted earnings per share (EPS) between $13.20 and $13.45, reflecting a 9.3% increase at the midpoint. Tariffs may pose more significant challenges in 2026 and beyond.

Strengths and Competitive Advantages

Stryker’s diverse range of equipment beyond orthopedics serves as a robust growth driver. The company has a proven track record of innovation, continually introducing new product improvements. This innovative capability is a key competitive advantage. Furthermore, high switching costs deter surgeons from changing to different equipment, providing Stryker with insulation against long-term declines, even as fewer patients undergo surgeries in the short term.

Valuation and Future Outlook

Currently, Stryker shares are priced at about 28.3 times forward earnings. This valuation seems reasonable given the company’s strong competitive position and potential to expand operating margins over time while continuing to invest in innovation for future revenue growth.

Should You Invest in Meta Platforms Now?

Before investing in Meta Platforms, it’s essential to consider some insights:

The Motley Fool Stock Advisor analyst team has recently highlighted what they believe are the 10 best stocks to buy right now, and Meta Platforms is not among them. The chosen stocks have the potential for significant returns in the upcoming years.

For example, when Netflix was selected on December 17, 2004, an investment of $1,000 would have grown to $617,181! Similarly, an investment in Nvidia when it made the list on April 15, 2005, would be worth $719,371 today.

It is important to mention that Stock Advisor boasts an average return of 909%, significantly outperforming the S&P 500, which stands at 163%. Don’t miss the latest top 10 list available when you join Stock Advisor.

See the 10 stocks »

Randi Zuckerberg, former director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board. Adam Levy invests in Meta Platforms and Microsoft. The Motley Fool holds positions in and recommends both companies, along with certain options. The Motley Fool’s disclosure policy outlines these affiliations.

The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.