Today, I’m looking at two UK stocks that could be said to be straight out of billionaire investor Warren Buffett’s playbook.
The first is a FTSE 100 company we know he was interested in acquiring. The second, a FTSE SmallCap stock, is ploughing the same value furrow Buffett pumped $6bn into last year. Here’s why I’d be happy to buy both these FTSE stocks right now.
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An archetypal Warren Buffett stock
In 2017, Kraft Heinz — majority-owned by Buffett and private equity giant 3G — made a pig’s ear of a 4,000p-a-share takeover approach for Unilever (LSE: ULVR).
It’s easy to see why Buffett was keen on Unilever. He loves strong brands, reliable cash flows and a high return on equity (ROE).
Whether that return’s measured as net profit, or Buffett’s modification of it, which he calls ‘owner earnings’, Unilever was delivering a consistently high ROE. And it still is. Over 30% last year.
After Team Buffett’s failed approach, Unilever’s shares went on to make an all-time high of over 5,000p. Lately, they’ve been trading below 4,000p.
Volatile operating environment
There have been well-publicised problems with global supply chains and cost inflation. And Unilever recently acknowledged this volatile operating environment is giving it a bit of bother.
The share price could fall further, if the issues become more severe and/or protracted than currently envisaged. This would be a risk to my investment. Nevertheless, I see long-term value with the price below the Kraft Heinz/Buffett 4,000p-a-share shot at the company.
Buffett looks to the Far East
Last year, Buffett invested $6bn across Japan’s five big sogo shosha. He took a 5% stake in each. Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo are major trading companies with many joint ventures around the world.
They were cheaply priced on their assets. And Buffett also hopes to engage with management on future partnerships and “opportunities of mutual benefit.”
A small UK investment house I’ve long admired, Asset Value Investors (AVI), was an early mover into Japanese value.
Many Japanese companies had built up extraordinary amounts of cash (a lingering overreaction to Japan’s economic bubble-bust of the 1990s). At the same time, the Japanese government and domestic shareholders were becoming increasingly miffed by their inefficient use of capital.
AVI began building stakes in a range of such companies. It also began engaging with management on improving governance and focus on shareholder value.
By 2018, AVI was so convinced by the depth of the value on offer in Japan it launched the AVI Japan Opportunity Trust (LSE: AJOT).
At the last reckoning, a whopping 83% of its portfolio companies’ aggregate market capitalisation was represented by cash and investment securities. Their aggregate ROE was a modest 9%. But strip out the relatively unproductive cash and investment securities, and the ROE was 27%, indicating strong core operating businesses.
Naturally, AVI is delighted it “has now been joined by a steady stream of investors from around the world identifying and attempting to unlock often extreme value in Japan… most notably Warren Buffett buying a portfolio of trading companies.“
AVI Japan has stakes in over 20 firms, but I do have to accept there’s single-country risk with a geographically-focused trust like this. Despite the risk, I think the value opportunity here is compelling, even if I can also see some potential high-return stocks in other markets.