It’s hard to talk about value stocks without Warren Buffett eventually entering the conversation. The ‘Oracle of Omaha’ has built a $110bn fortune by successfully identifying and capitalising on terrific businesses trading at discounted prices. And while his investing activities have largely been in the US, there are plenty of opportunities in the UK that suit his style. At least that’s what I think.
With that in mind, let’s explore two businesses I believe have some of the key traits this investing legend looks for.
Profiting from concrete
Somero Enterprises (LSE:SOM) has had a pretty tough times of late. With rising interest rates causing delays of infrastructure construction projects, demand for the firm’s laser-guided concrete laying screed machines has been low these past 18 months. And with extreme weather conditions and storms emerging these past few years, the firm’s earnings and revenue have been a bit lumpy.
However, management has a long track record of dealing with the cyclical nature of its customers. It purposefully keeps a lot of cash at hand to weather these down periods, keeping debt under control and continuously investing in developing new machines.
Manageable debt is a trait Buffett likes to see. But, more importantly, it’s a competitive moat. While the company has its fair share of competitors, Somero is currently the leader by revenue. Its patent-protected technology seems to far outperform competing solutions, resulting in pricing power and a reputable brand.
With the US government passing its $1.2trn infrastructure bill in 2021, the growth potential for this business in this region looks immense. Even more so, considering the group is well-established in North America, generating the bulk of its revenue there.
Pairing all this with a price-to-earnings (P/E) ratio of just 7.2, these shares look undervalued, in my mind. That’s why I’ve already added it to my portfolio.
Cardboard is the new gold?
Paper packaging company DS Smith (LSE:SMDS) likely isn’t on many investor’s radars. After all, a cardboard manufacturer doesn’t exactly sound like a high-growth opportunity. Yet, with the rise of e-commerce, long-term demand for its products is trending upwards.
In the last couple of quarters, corrugated box volumes for this business have shrunk as online stores suffer an industry-wide slowdown in spending. That’s not surprising, given inflation has been ravaging economies all across Europe, where DS Smith primarily operates.
Despite this, revenue and profits have still been growing by double digits as management hikes its prices. That may seem odd, considering the recipe for cardboard is hardly a secret. In fact, the barriers to entry are pretty low.
However, DS Smith’s key advantage is its size, specifically its production capacity. No other company in Europe currently matches the volume this firm can produce. As such, customers like Amazon, which requires enormous volumes of cardboard for order fulfilment, don’t have the option to turn to a rival supplier, even if they’re cheaper.
As lucrative as this advantage is, DS Smith isn’t without its weaknesses. Most notably, the cost of production is largely out of management’s control, especially when it comes to energy prices.
But with a P/E ratio of 8 and a dividend yield of 6%, I can’t help but feel investors are underappreciating this enterprise. That’s why I’m tempted to snap up more shares once I have more capital at hand.
