Warren Buffett, aka, the Sage of Omaha, is one of the most successful investors of all time and a well-known billionaire. His investing style, though, has changed over time, partly thanks to his business partner, Charlie Munger.
These are my top Warren Buffett stocks – ones that might fit the mould of how the Sage of Omaha would invest, if he was looking at high-quality, undervalued UK shares.
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They are the ones I’d be most tempted to buy with my next £250 of cash.
Top Warren Buffett stocks
The search for Warren Buffett stocks is not easy, of course. Yet I think there are two that fit the mould based on a margin of safety and an enduring brand quality.
Shares in the spreadbetter IG Group (LSE: IGG) have been falling, creating a greater safety of margin. Combining that with a price-to-earnings multiple of seven and a price-to-book value of 1.79 shows that the shares have an undemanding valuation. It is a cyclical business with some regulatory risk, so it may not be a perfect Warren Buffett stock, or indeed everyone’s cup of tea, but it does have decent revenue growth. It also has high margins and returns on equity that make me think it meets quite a lot of Buffett’s quality-focused investing criteria. For example, return on equity is 28%. I already own CMC Markets, a competitor, so I wouldn’t buy the shares, even though they seem to be a Warren Buffett-style of stock.
The next Warren Buffett stock is Somero Enterprises (LSE: SOM), which creates machines used in construction. It’s a niche business. There’s a risk a competitor could produce a better quality product, usurping Somero’s USP, which seems to be that its machines are more precise and higher quality than the competition. It does have the potential for global growth – though it has struggled in China, which is a setback. On the value front, its P/E is 19, while the EV to EBITDA, another important value-focused metric comparing the enterprise value to EBITDA, is seven, which is low and indicates good value. The group has a return on equity of 23%, and margins are high, so it has serious signs of being a high-quality share.
The shares have been falling, though, and clearly the P/E is higher than other UK shares. However, on other metrics, it does show value, as the low EV to EBITDA measure shows. Overall I expect the shares to grow as the company does well in the US. I’m seriously considering buying more Somero shares very soon.
The market dip
One last note is just to say that Warren Buffett is unlikely to be concerned by the recent stock market declines. He’s the consummate long-term investor. I have a strong feeling, that like other long-term investors, he’ll see shares falling as more of an opportunity than a disaster – as painful, and potentially scary, as it may feel right now.