Legendary US investor Warren Buffett only holds one British stock in his Berkshire Hathaway portfolio — that’s Diageo. That’s probably not the best advert for the FTSE 100. But, I think Buffett might be missing out on a a few opportunities by avoiding UK-listed stocks.
Maybe this is my chance to outdo the billionaire investor.
Buffett’s strategy
The so-called Oracle of Omaha uses a value investing strategy. Such strategies have consistently outperformed the index over the last century. Value investing involves selecting stocks that trade for less than their intrinsic, or book, value.
As such, Buffett focuses on buying undervalued stocks. That’s not the same as companies that look cheap because they’re less expensive than they were a year ago.
Finding undervalued stocks requires research. Investors using the value investing strategy run models and compare near-term metrics to create a better understanding of a company’s value.
Value investing on the FTSE
Buffett once said: “A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful.”
Well, looking at the FTSE 350, it’s clear that many investors are fearful. The index is up 1% over one year and just 5% over five years.
It’s important to highlight that some parts of the index are surging — namely resources and energy — while other parts of the market have suffered. Stocks in housebuilding, banking, retail and travel are among the worst performing sectors.
While the macroeconomic forecast in the UK plays a part in this, some British stocks have been unpopular for a while. Investment in general has slowed since the Brexit vote as our EU exit is expected to have lowered the nation’s growth prospects.
However, in a gloomy market, I contend we stand a great chance of finding undervalued stocks.
Quality picks
Buffett often says he’d rather pay a fair price for a great company than a great price for a fair company.
But right now, on the FTSE, I think there are plenty of blue-chip stocks trading at discounts. Two are Lloyds and Barclays. Discounted cash flow models suggest they’re undervalued by as much as 60% and 70%, respectively.
Naturally banks reflect the health of the economy, and recessions — like that forecast in the UK — mean more bad debt and impairment costs. However, conditions are a little different right now, with interest rates at levels not seen in over a decade. These rates are causing revenues to surge.
There are other quality companies on the FTSE 100 that are trading at attractive discounts right now, including Legal & General and GSK.
These firms would likely receive a boost by a general improvement in the UK’s macroeconomic outlook. I’m hoping this will happen.
More bargains
I’m also looking at stocks in the UK’s burgeoning renewables industry. One such is Greencoat UK Wind which trades at a 5.1% discount versus its net asset value and has a price-to-earnings ratio of around 7.5. It also offers a 4.8% dividend yield.
In the near term, its development might be held back by the electricity levy, but in the long run, I expect it to flourish.
I’ve recently bought shares in all of the aforementioned companies. But with the discounts in mind, I’m looking to buy more.
