Warren Buffett’s approach to investing is to focus on high-quality companies that are unpopular. With stocks near record highs, I’m going to do something similar.

Just over a decade ago, his investment vehicle, Berkshire Hathawaybought enormous shares in a company producing agricultural equipment John Deere during the economic downturn in agriculture. My latest idea is consistent with this idea.

Buffett’s investment

Between 2012 and 2016, Berkshire purchased just over 7% of Deere’s outstanding shares. This occurred at a time when the industry was impacted by delicate grain prices.

In many ways, it was a classic Buffett investment – shares of a high-quality company trading at a discount due to transient problems. But not everything went according to plan. It took a long time for grain prices to recover, remaining in a long decline until around 2020. That was enough for Berkshire to abandon its investment.

This shows that there is never a guarantee that investments will work, even with the best in the industry. But right now I’m considering a similar idea for my portfolio.

Secular growth

The stock market I am looking at is CNH Industrial (NYSE:CNH). Like Deere in 2012, it is an agricultural equipment maker that is offering discounts as crop prices drop.

This idea didn’t work ten years ago. However, I think the rise of automation in agriculture means that investing these days is not just about waiting for a cyclical rebound.

In the absence of road traffic, it is much easier to build a self-driving tractor than an autonomous car. CNH expects this part of its business to account for 10% of sales by 2030.

Source: Presentation of CNH results for the second quarter

This is double the current level and the company expects it will mean an raise in margins in its agricultural business from approximately 8% to 16%. Other things being equal, this means profits should double.

Unfavorable valuation

The company’s shares are trading at a forward price-to-earnings (P/E) ratio of approximately 14. This is well below S&P500 average and based on wages that have fallen due to lower crop prices.

The company has a lot of debt on its balance sheet, which poses risks, especially if interest rates don’t fall as expected. But it’s not necessarily as elementary as it seems.

Approximately 80% of the company’s debt is covered by debt financing. In other words, it is cash that a company borrows and lends to customers to aid them finance their purchases.

If CNH customers meet their debt obligations, I don’t expect debt to become a problem. And if it fails to do so, it can seize equipment used as collateral to offset losses.

Finding stocks to buy

In a 2022 interview, Berkshire investor Todd Combs outlined three things Buffett looks for in a stock worth buying. I think CNH can meet all of them.

The first is a forward P/E ratio below 15. The second is a 90% chance of higher earnings within five years, and the third is a 50% chance of earnings growth at a rate of 7% per year.

Increased automation in agriculture should generate sustainable growth. And with agricultural commodities at an extremely low level, I want to take advantage of that.