Legendary investor Warren Buffett, the mastermind behind Berkshire Hathaway (BRK.A) (BRK.B -0.59%), has long been renowned for his astute investments in consumer-facing giants like Coca-Cola, Apple, and American Express. However, in a recent turn of events, Berkshire has shown a shift by increasing its stake in Heico (HEI 1.16%), a company that often flies under the radar. Let's delve into why Heico might have caught Buffett's attention and whether it's a worthy investment today.

Why Heico Stands Out

Heico defies the norm set by Buffett's affinity for consumer-facing brands. This company specializes in supplying components for a diverse range of sectors including aerospace, aviation, industrial, electronic, and military applications. With annual sales of approximately $3.8 billion, split roughly 2-to-1 between its flight support and electronic technologies business units, Heico has carved a niche for itself.It has been a public entity for decades and has outperformed the S&P 500 index over its lifetime. One of the key factors behind its success is its serial acquisition strategy. In a highly fragmented industrial components space where many small companies supply parts to various end markets, Heico seizes opportunities to acquire these firms, thereby expanding its product offerings. Since 1999, Heico has acquired nearly three dozen companies, which has been a significant driver of its long-term growth.

Buffett's Attraction to Heico

What exactly attracted Buffett to Heico? While we can't read his mind directly, we can look at the indicators. The company's sustained and efficient growth is a major draw. As Heico has expanded, its stock has likely benefited. But it takes more than just growth; a company must also be efficient and profitable to generate the kind of returns seen in Heico stock. Over time, Heico has steadily achieved a higher return on equity (ROE), which indicates a well-managed company. Management must make wise use of financial resources, invest in the business, pay reasonable prices for acquisitions, and manage the balance sheet effectively. A growing and well-run business typically leads to long-term exceptional investment returns.

Evaluating the Current Stock Value

Buffett is known for his strict criteria when it comes to stock prices. It's worth noting that Berkshire's Heico stake currently makes up only about 0.1% of its portfolio, and its third-quarter buying was relatively modest, increasing the stake by less than a percentage point. Based on this, Heico stock seems expensive. The stock trades at a forward P/E ratio of 65, and analysts estimate that the company will grow earnings by almost 20% annually over the next three to five years, resulting in a PEG ratio of 3.3, which is relatively high based on its anticipated future growth. Generally, I prefer to see PEG ratios under 2.5 for the best businesses and 2 for most others.However, Heico is still a new holding for Buffett; Berkshire's first purchase was only in the prior quarter. Investors should take Buffett's lead and approach these prices with caution. It might be wise to keep some cash on hand in case the broader market declines and Heico stock becomes more attractive. It's possible that Buffett has a longer-term plan in mind.In conclusion, Heico is a company with a unique story and potential. While it may not fit the traditional mold of Buffett's investments, its track record and growth prospects make it a stock worth considering. As with any investment, careful analysis and a long-term perspective are crucial.