Over the years, he built it into a conglomerate with a diverse portfolio of businesses, including insurance, manufacturing, and retail. His investment successes have made him one of the wealthiest individuals in the world, but he is also admired for his philanthropy and simple lifestyle.

However, not everybody agrees with his investing style. Recently, the value investing strategy that he swears by has come into question. In July, Forbes contributor Jim Osman bemoaned “the availability of easy financial data” that has “resulted in market saturation“.

He feels this has left few stocks undiscovered or under-priced, limiting the efficacy of the value model.

Value investing involves picking undervalued companies with solid fundamentals and long-term potential. The philosophy, often outlined in Buffett’s annual letters to Berkshire Hathaway shareholders, emphasizes the importance of patience, discipline, and a long-term perspective.

While these simple rules remain pertinent today, Osman feels some adaption could be beneficial. In certain cases, I think he’s right.

Changing times

Let’s consider a stock Berkshire Hathaway recently sold as an example. Earlier this year, the firm unloaded 63.3m Paramount Global (NASDAQ: PARA) shares at a loss. The stock was down almost 70% at the time.

Buffett took full responsibility for the loss but the question is: why, in today’s world, did his traditional methods fail?

Paramount has faced significant challenges in recent years, leading to the price decline. The primary factors contributing to this downturn are the rise of streaming giants like Netflix and Disney+. As consumers shift towards streaming services, the traditional cable television networks that Paramount relies on have been experiencing declining viewership.

I believe a lot of this behavioural change is driven by a shift in how people make choices. Where previously we relied on the advice of professionals, today, customer reviews control the narrative. Before, we would speak to a travel agent, read Roger Ebert reviews or consult a stock broker. Now, we check Trip Advisor, Rotten Tomatoes, and Trustpilot.

The case for a recovery

While the Berkshire sale hurt Paramount, I think the stock could still recover. To do so, it must embrace the changing times and implement effective strategies to recover its market share. In particular, its strong brand and extensive content library could give it a competitive advantage. If it can successfully market it’s Paramount+ on-demand service to corner more of the streaming market, it may be able to achieve this.

Looking at the balance sheet, its debt is $14bn and equity $17bn. This is similar to Netflix, which is up almost 50% this year. However, it has less cash and lower interest coverage. Earnings are forecast to grow 77% per year and based on future cash flow estimates, the shares are trading at 75% below fair value.

I wouldn’t say it’s a stock I want to dive into right now but it’s in a decent financial position and could recover with the right strategy. Who knows, Buffett may even regret the sale one day.

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1. TSMC

Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is a semiconductor foundry that makes chips for leading tech companies like Apple, AMD, and Qualcomm.

Amid declining chip demand this year, Buffett practiced what he always preaches — “Be greedy when others are fearful”. The Oracle of Omaha took the opportunity to take advantaged of the stock’s discounted price, and bought a big position worth $4.1bn.

The company has solid growth potential. Demand for faster and more powerful processors keeps increasing every year, and there are few other semiconductor manufacturers that can match TSMC’s production capability. Additionally, it’s been growing its profit margins over the past decade.

The foundry also has ambitions to diversify its geopolitical risks. It’s planning on building two factories in the US in the coming years, which could ease investors’ worries about a Chinese invasion of Taiwan.

2. Paramount

Warren Buffett’s investment in Paramount (NASDAQ: PARA) is a fascinating one. That’s because it’s one of the few big tech investments that he’s made. The film studio and broadcaster owns the rights to renowned films such as Mission Impossible, Star Trek, and The Godfather. It’s also seeing the benefits from producing shows for streaming services such as Netflix and Amazon Prime Video.

Advertising revenue is expected to drag the company’s overall revenue in the next couple of quarters, but its long-term outlook looks positive. This is due to the studio’s strong moat and presence across media channels in the US.

Having said that, I’m paying close attention to the state of its balance sheet. While its debt-to-equity ratio isn’t staggeringly high, it’s worth noting that its cash and equivalents don’t cover its total debt. This is even more worrying when taking into account its negative free cash flow.

3. RH

Restoration Hardware (NYSE: RH) is a luxury furniture and home-decor retailer. It’s managed to stay afloat in an increasingly competitive retailing landscape.

Its success can be attributed to a well thought-out omni-channel strategy. Its top line figures grew by 32% this year, thanks to its new, modern, and convenient shopping experience for customers.

Headwinds for the furniture conglomerate can’t be ignored, as housing activity continues to decline. However, RH’s long-term outlook remains strong given its pipeline of luxury ideas. This is evident through its recent expansion into other categories, which include modern, teen, and hospitality. These are areas its competitors have barely touched. If successful, this could help RH capture incremental market share.

The firm’s balance sheet isn’t terrible, but it’s not the best either. It’s got a high debt-to-equity ratio of 203.5%, but its cash and equivalents are sufficient to cover its short-term debt. Even so, its declining free cash flow is something I’m keeping a close eye on.

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