Could my Warren Buffett–style investment rise 50% in the next few years?

Our author’s investment in Gamma Communications was inspired by Warren Buffett and his mentor, Benjamin Graham. Let’s see how.

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Warren Buffett at a Berkshire Hathaway AGM

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Investing is all about value, in my opinion. Just as important as finding a good company is finding it at a decent price. Sometimes, I trade one quality for the other. Warren Buffett has said this, too. Great companies often don’t sell cheap.

However, sometimes I get lucky. There have been times when I’ve found top-class companies that are selling at what I deem way below fair value. I think Gamma Communications (LSE:GAMA) is one such firm.

A look at the business

It’s a telecommunications giant with a market cap of over £1bn. It operates in call management, mobile, connectivity, and unified communications, among other areas.

What I like most about the business is that it has near industry-best net margins of 10% and a really strong three-year 13% revenue growth rate.

Additionally, with the price around 50% below its high, I think this is a big opportunity.

Even from a balance sheet perspective, it has a cash-to-debt ratio of 10, which is stellar for the industry. That protects it from lower margins as a result of needing to pay off its liabilities.

A couple of risks

Now, with investments like this, there’s usually one big caveat. Even if a company is stellar, Mr. Market (one of Benjamin Graham’s personifications) could vote the company down for who knows how long.

That means patience is a quality I know I have to have for this value investment to pay off.

If the shares go down 15% in the next year, that doesn’t mean they won’t rise 50% in a few years after that.

Of course, there’s no guarantee of that. If the financials of the company change, I could find I need to sell.

Additionally, the company only has a dividend yield of 1.4%. So, if the share price doesn’t rise, there’s not really much passive income opportunity.

How Buffett invests

Buffett started his career as a value investor and later changed his philosophy slightly when his friend and business partner Charlie Munger convinced him to buy high-growth companies at a reasonable price.

The great thing is that Buffett never really let go of his value principles, and when he found great companies at low valuations, he went all in. He first bought Coca-Cola shares in 1988 after the 1987 stock market crash. A very clever move, in my opinion.

While the Gamma Communications share price isn’t down due to a crash, its stock price has fallen. A 50% decline is a lot, especially when you consider that Coca-Cola shares only fell around 30% between 1987 and 1988 when Buffett bought them.

A long road to profits

I think 50% profits in the next few years might happen for my Gamma investment if the price reaches its all-time high again.

Investing, just like life, is a long road to success and profits. I wish every overnight success could really be overnight, but usually, it’s the result of years of hard work.

Value investing is no different, in my opinion. The work is all in the research. Then, when I know I’ve got a good one, I throw my chips in and sit and wait.

That’s why I think investing is the best game in the world: the winners are usually the wisest and most patient.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Oliver Rodzianko has positions in Gamma Communications Plc. The Motley Fool UK has recommended Gamma Communications Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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