It’s no secret that Warren Buffett loves cheap shares. As the billionaire investor famously said: “Whether we’re talking about stocks or socks, I like buying quality merchandise when it is marked down”.
Today, many high-quality UK shares are marked down. And it’s this combination of cheap values and quality that makes me think there’s no better place to invest my money right now.
Yet I won’t just be loading up on any old beaten-down stocks. Some FTSE 100 firms are saddled with eye-watering levels of debt and/or have gone ex-growth. I’m not interested in those for 2024.
Here’s where I’ll be focusing my attention instead.
One of Buffett’s favourite industries
Buffett is a big fan of insurance firms. That’s why his Berkshire Hathaway conglomerate owns many of them outright, including Berkshire Hathaway Specialty Insurance, GEICO, and General RE.
One big reason why is that insurance companies provide a source of low-cost capital known as ‘float’.
When individuals or businesses purchase insurance policies, they pay premiums upfront. However, the insurer obviously doesn’t pay out settlements immediately.
So float is the money held by insurance firms that hasn’t yet been paid out to claimants. And this pool of funds can be used to invest in various assets to help offset risk and generate returns.
FTSE 100 insurance giants
Two insurance stocks I’m buying for 2024 are Aviva (LSE: AV.) and Legal & General (LSE: LGEN).
Both shares are down this year as higher interest rates and an uncertain global economy have cast a shadow over their prospects.
Of course, these issues haven’t gone away and both stocks could continue to underperform, especially if economic conditions worsen.
However, I think they could both prove to be long-term bargains. Aviva is trading on a forward price-to-earnings (P/E) ratio of 10.8, while L&G is on a P/E of 9.9 (both for 2023’s expected earnings).
Those are lower multiples than the wider FTSE 100, which itself is valued extremely cheaply.
Meanwhile, the dividend yield is 7.7% for Aviva and 8.7% for L&G. Again, that’s far higher than the market average.
Looking forward, I’m optimistic about the growth potential in bulk purchase annuities. These involve pension schemes offloading liabilities to specialised insurers.
Close to £30bn of pension liabilities were transferred to the UK insurance industry last year. This is tipped to continue growing for many more years.
Aviva is the next stock I intend to buy in November, while I already reinvest any dividends I receive from L&G into buying more shares.
A Buffett pick
Finally, I’m going to add to my holding in Diageo. The global spirits giant already counts Berkshire as a shareholder.
In fact, the firm’s shares enjoy quite a bit of smart backing. It is a top holding in both Nick Train’s Finsbury Growth & Income Trust as well as Baillie Gifford UK Growth Trust.
One major concern right now is a slowdown in spirits sales in Diageo’s core US market. But with its powerful brands like Johnnie Walker and Casamigos tequila, I reckon it’s just a matter of time before growth kicks in again.
Meanwhile, the stock currently has a P/E ratio of 19. It’s been many years since Diageo’s valuation was that cheap — and it looks too good to pass up to me.
