I think Buffett’s approach is revealing – and potentially helpful for other investors even on far more modest budgets.

Sometimes, markets act in odd ways

A critical thing to understand is that, for Warren Buffett, the stock market can largely be ignored.

What I mean by that is that the day-to-day shift in share prices does not interest a long-term investor such as Buffett the way it may a speculator. Indeed, the Sage of Omaha has said that the stock market could close for a decade and it would not bother him.

That is because his investing approach is built on the idea of identifying businesses with brilliant financial characteristics, buying into them when the share price is attractive and then hanging onto the investment for a long, long time. Indeed, Buffett has described his favourite holding period for a share as ‘forever’.

One reason that approach has been so lucrative for Buffett is that sometimes, markets can behave in what seem like irrational ways. A wider panic can mean brilliant quality share prices come crashing down, even though their longer-term prospects may be largely unchanged.

Such sudden opportunities to buy quality on the cheap mean that Warren Buffett has turned multiple nervous stock markets over the decades to his financial advantage.

Buffett’s focus is on quality, not just price

Case in point: Goldman Sachs (NYSE: GS).

Few financial institutions have its clout, client base or dealmaking expertise. But during the 2008 financial crisis, Goldman wanted to raise a large sum of cash and picked up the phone to a man they knew could help: Warren Buffett.

This was a great deal for Buffett. For putting $5bn into Goldman, he got preferred shares that yielded 10% until the bank paid him to buy them back from him. He also got warrants allowing him to purchase tens of millions of Goldman shares in the next five years at what later turned out to be a bargain price. Buffett has made over $3bn from the $5bn investment.

Small private investors are not getting to get a call from a legendary investment bank offering them that sort of a deal.

I’m getting ready now for future market volatility

But I do think there are some lessons we can all learn from it when it comes to using the opportunities presented in a stock market crash or correction to try and build wealth, on any level.

One of them is not to go bottom fishing at the cost of quality. Buffett’s investment in Goldman reflects his well-known liking for companies with proven business model, strong business franchises, long-term and client demand.

Some shares can fall during market volatility and look cheap at the time – but their price never recovers. That did not happen with Goldman. If I go shopping for bargains during the next period of serious market volatility, I will do so with Buffett’s focus on business quality, not just price.

The post Warren Buffett’s made billions in nervous markets. Here’s how! appeared first on The Motley Fool UK.

The company has been facing a range of challenges recently, but things might be showing signs of turning around. So the stock continuing to fall might make things more attractive. 

Analyst ratings

While analysts have mixed views on Diageo, things have started to look more positive recently. A good example is Goldman Sachs, which downgraded the stock to Sell in July. 

The reasons cited included concerns over growth in North America and over-reliance on tequila products. But in August, the bank upgraded the FTSE 100 stock to Hold. 

The main reason seems to be that the share price had reached a point where the equation looked more attractive. And Goldman isn’t the only example of this. 

In September, the number of analysts with Buy or Outperform recommendations increased, while the number of Sell ratings went down. But the stock just keeps going down.

Macroeconomic issues

While Diageo didn’t issue a trading update in September, there were a few potential warning signs for investors. One was the inflation data from the US, which wasn’t entirely positive for the firm. 

The latest Consumer Price Index (CPI) reading showed a 2.9% increase, which was higher than the previous update. That’s not a good sign in terms of discretionary spending in the US. 

On top of this, the latest update from alcohol wholesalers indicated that inventories are unusually high relative to sales. And that’s another potential issue in terms of demand in the near future.

In general, it’s updates like these that have been weighing on the Diageo share price recently. While the market waits for the firm’s next update, the signs aren’t particularly encouraging.

Long-term investing

With where Diageo is at the moment, I think it’s worth a look from a buying perspective. But only for investors that are willing and able to take a long-term approach.

The company is looking to cut costs as a way of offsetting some of the short-term challenges its facing. But this isn’t a viable strategy for durable growth. 

While there are issues on the demand side, though, Diageo still has an extremely strong competitive position. And I think this is what will matter over the long term. 

The current challenges aren’t really showing signs of subsiding, so investors looking at the stock will need to be patient. But I think the falling share price is an opportunity worth considering.

Timing

I think a 14% drop in September means right now is a good time to consider buying Diageo shares. There are clear challenges, but I’m not convinced the business is in terminal decline. 

I can’t see any reason that supports the idea that a recovery in the share price is imminent. But from a long-term perspective, the current valuation means the equation looks much better.

At today’s prices, I’m not sure that much needs to go right with the business for the stock to be a good investment over time. And that’s the kind of situation I like the look of.

The post Why Diageo shares fell 14% in September appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Adobe

What it does: Adobe provides software products that help individuals and businesses create and optimise digital content.

By Ben McPoland. Software giant Adobe (NASDAQ: ADBE) is now 40 years old, but it’s far from a spent force. Its products – such as Photoshop, Illustrator, and Acrobat – remain in high demand. And the trends of software and digitisation only seem to be getting stronger.  

Yet the stock is down 50% since November 2021. Partly this relates to its proposed $20bn acquisition of Figma, a fast-growing rival design software firm.

Though that’s a hefty price tag, Adobe did generate $7bn in free cash flow last year. That’s enough to fully digest the Figma acquisition within three years, assuming current profits continue.

One risk I see is competition from AI-powered creativity platforms like DALL-E. They could threaten Adobe’s wide moat in creative software. However, I fully expect the company to also infuse its products with artificial intelligence. It has very deep pockets and isn’t going to be disrupted without a fight.

Ben McPoland owns shares in Adobe.

Amazon 

What it does: Amazon is the world’s largest online retailer and marketplace. 

By G A Chester. Amazon (NASDAQ: AMZN) shares are down by around a third since this time last year. That’s around 50% below their all-time high. The decline has put the stock on price-to-sales and price-to-book valuation measures that have not been seen for many years. 

Amazon may be a colossus of a company, but I think it can continue to deliver good growth in the current decade and beyond. It enjoys a structural tailwind from expanding online shopping. Amazon Web Services, its cloud computing platforms business, is going great guns. And it has its fingers in other tasty pies, including artificial intelligence and autonomous vehicles. 

However, the macroeconomic backdrop is currently unhelpful for its core retail business. Management cut revenue growth guidance for the last quarter from 15% to 5%. If growth were to become persistently anaemic, there’s a risk the market could de-rate the stock still further from its already historically low valuation. 

G A Chester does not own shares in Amazon.

Apple

What it does: Apple is a technology company that designs and manufactures smartphones, computers, tablets, wearables, and accessories.

By Edward Sheldon, CFA. Apple (NASDAQ:AAPL) shares have experienced weakness in recent months and I’m viewing the pullback as a buying opportunity.

In the near term, Apple is facing a few challenges. Supply chain issues are one. Inflation and its impact on consumer spending is another.

However, I think the company has a lot of potential in the long run. One area that could drive growth going forward is healthcare. Here, Apple is making great strides with its Watch.

One thing Apple has going for it right now is share buybacks. Last financial year (ended 30 September 2022), the company bought back $90bn worth of stock. Buybacks should support earnings per share going forward.

Of course, there’s always the chance that Apple’s share price could continue falling in the short term. Tech stocks don’t have a lot of momentum at present. However, in the long run, I expect the share price to climb higher.

Edward Sheldon owns shares in Apple.

eBay

What it does: eBay operates auctions and other online marketplaces in a variety of markets worldwide

By Christopher Ruane. A lot of customers use eBay (NASDAQ: EBAY) hoping to snag a bargain buy. But I reckon the potential bargain right now might be eBay itself. The online giant’s shares have fallen a fifth in the past year.

I think there is work to do at the company, to improve the user experience and lifetime customer value. Revenues in the last quarter fell 5% year on year. But it is a free cash flow machine. The business generated $633m of free cash flow in the quarter, which I think makes its market capitalisation of $25bn look cheap.

With 135m active buyers and the network effects of a strong market position, eBay has substantial pricing power.

Earnings could fall if eBay further alienates its user base. But a strong brand and existing user base give it the sort of moat Warren Buffett likes when investing. That helps eBay throw off sizeable profits and cash flow.

Christopher Ruane does not own shares in eBay.

Goldman Sachs

What it does: Goldman Sachs is a US investment bank specialising in trading, investment banking, and asset management.

By Stephen Wright. My top US stock to buy in February is The Goldman Sachs Group (NYSE:GS). In the current economic climate, this might seem like a strange choice, but I’m looking to get in while the stock is out of fashion.

The stock currently trades at a price-to-book (P/B) ratio of 1.14. Over the last decade, Goldman has averaged a return on equity (ROE) of around 15. 

Dividing the ROE by the P/B ratio gives a return of around 13%. Going forward, I think that’s attractive.

The current economic climate is difficult for Goldman’s services. Tighter conditions have led to reduced IPO, SPAC, and merger activity, which has been weighing on investment banking fees. 

I expect these headwinds to subside over time, though, and I think the company will do well when it does. The stock looks like great value to me at today’s prices, so I’m looking to buy it in February.

Stephen Wright does not own shares in Goldman Sachs.

Johnson & Johnson 

What it does: J&J is the world’s largest healthcare company. It makes pharmaceuticals, medical devices, and consumer goods.

By Charlie Carman. Johnson & Johnson (NYSE:JNJ) stands out to me as an excellent defensive investment thanks to its rock-solid financials.

The company has hiked its dividends for 60 consecutive years. Provided it remains profitable, I expect I can rely on the firm as a core part of my passive income portfolio for many years to come.

The full-year 2022 results revealed steady progress. Worldwide pharmaceutical sales increased by 1.7% to $52.6bn and the MedTech division also delivered sales growth of 1.4% to $27.4bn. However, consumer health sales retreated slightly to $15bn — a 0.5% decrease.

Although I might be sacrificing the opportunity to buy more speculative growth stocks by holding Johnson & Johnson shares, that’s fine by me. The healthcare giant has always successfully weathered periods of macroeconomic turbulence throughout its 137-year history.

With the prospect of a global recession on the horizon, I’m glad to be a Johnson & Johnson shareholder.  

Charlie Carman owns shares in Johnson & Johnson.  

Masimo Corp

What it does: Masimo is a leading designer and manufacturer of non-invasive patient monitoring technologies.

By Zaven Boyrazian. Technology lies at the heart of modern healthcare, with companies like Masimo (NASDAQ:MASI) leading the charge. The company is a designer and manufacturer of high-precision non-invasive monitoring devices.

Its flagship Signal Extraction Technology (SET) is already being used in hospitals worldwide. What started as a relatively simple blood oxygen monitoring device has evolved drastically, and is now capable of reading carbon monoxide, haemoglobin, and methaemoglobin levels as well as changes in respiratory cycles without any needles.

Given the importance of patient monitoring, especially during the pandemic, it’s not surprising that Masimo has beaten analyst earnings forecasts for more than five years in a row. And with new hospital automation products hitting the market, this momentum doesn’t seem to be slowing down.

The valuation is undeniably lofty, opening the door to volatility, especially if earnings become adversely impacted, even if it’s temporary. Nevertheless, given the group’s long-term potential, it’s a price worth paying, in my opinion.

Zaven Boyrazian owns shares in Masimo Corp.

Nike

What it does: Nike designs, develops and manufactures and sells footwear, apparel and equipment. 

By Paul Summers. The time to absolutely pile into sportswear behemoth Nike (NYSE: NKE) may have already passed. The stock has staged an excellent recovery since last September. Even so, this is still a company I’d want to own. 

While the cost-of-living crisis may prove a temporary drag on earnings, Nike strikes me as quite defensive. A gym membership can be easily cancelled in tough times. But people will still want to exercise and need appropriate clothing to do so.

Regardless, it’s the long-term gains I’m interested in. On this front, Nike has been a clear winner thanks to its enduring brand. Consistently elevated returns on the money it puts to work point to a competitive advantage over rivals. These are the sort of things that can multiply my wealth over time.  

Still down over 10% compared to this time last year, Nike gets a tick from me. 

Paul Summers has no position in Nike.

TSMC

What it does: Taiwan Semiconductor Manufacturing Company is the world’s biggest and most advanced chip manufacturer.

By John Choong. Despite sliding more than 55% from its all-time high, TSMC (NYSE:TSM) stock has recovered admirably from its bottom. In fact, its shares are already up 25% this year. Despite analysts only pricing in a mere 10% upside from current levels for the year, I think the longer-term upside is much higher for several reasons.

The first being its strong moat. The Taiwanese foundry is head and shoulders above its competition and is already in the process of rolling out production for its 3nm chip. Additionally, it’s in the works of producing its revolutionary 2nm chips. This would put it two generations ahead of its closest competitors, Intel and Samsung. As such, it’s no surprise to see Warren Buffett snatch up a $4.1bn stake in the company as it’s seen meaningful margin expansion over the years.

Pair all of the above with its immaculate balance sheet, diversifying its geopolitical risks, and cheap forward multiples, and it’s easy to understand why the Oracle of Omaha started a position — which is why I own shares too.

John Choong has positions in TSMC.

The post Best US stocks to buy for February appeared first on The Motley Fool UK.

Inflation and the stock market

To keep price rises stable, the government sets the Bank of England an inflation target of 2% a year. This stability helps businesses and consumers plan for the future. Stock markets tend to like this level of predicability when it comes to the economy and company earnings.

If inflation does jump 10 times higher than this 2% target, then clearly the UK economy is in for a rough ride. Consumers will likely cut back on spending, which would hurt the earning potential of companies. The stock market will likely fall to reflect this decline. It could even crash.

So, what should I do (if anything) to prepare my portfolio for this possibility?

The long game

One of the most important lessons I’ve learned as an investor is to always remember the game I’m playing. There are many strategies and games being played each day in the stock market. There are day traders, speculators, hedge funds, and robot traders that buy and sell thousands of stocks per second.

I like to use a football analogy when thinking about this. Imagine there’s one giant pitch (the stock market), and there are thousands of different games of football being played on it at the same time. Professional, amateur, five-a-side, futsal, penalties, and so on. Every player is trying to win (make returns) within their own game.

However, most of these players are not playing my game, which is long-term investing. I have a different time frame to these other investors, yet we’re all on this same pitch that is the stock market. So I need to know which game I’m playing, and stick to it.

Success is where preparation and opportunity meet

To me, being long term as an investor means not being scared into selling my positions when economic downturns affect the market. I try to remind myself of this as much as possible, especially when markets tumble. It really helps me stay focused on my long-term plan of slowly building wealth over time.

Obviously it wouldn’t be nice to see the value of my portfolio fall if the market crashes. But I’ve built some cash reserves up so I’m not forced into selling my shares at lower prices.

I’ve also made a list of great companies I’d like to own if their shares went on sale during a crash. These include British drinks giant Diageo and Watsco, the leading HVAC distributor in America.

Ultimately, nobody knows for certain when a stock market crash will happen. If it’s this winter, then I’ll use it as a buying opportunity to add more shares to my portfolio.  

The post Will skyrocketing inflation spark a UK stock market crash this winter? appeared first on The Motley Fool UK.

As such, I own a handful of US equities in my portfolio. These are my three favourite US stocks to buy today. 

Stocks to buy for growth

The first company on my list, which I already own and would be happy to buy more of, is Visa (NYSE: V).

The corporation operates one of the world’s main payment networks. It connects buyers and sellers who are using Visa-branded networks and cards. With the number of cashless transactions rising worldwide, the company is one of the primary beneficiaries. 

What’s more, as one of the world’s largest payment network operators, Visa’s size is a substantial competitive advantage. It would cost a competitor tens of billions of dollars and many years to take over the firm’s position in the market. 

These are the two main reasons I would buy the stock for my portfolio today. However, the firm can’t take its position in the market for granted. Competitors are nipping at its heels. The company needs to stay alert to fend off the competition, or it could fall behind. 

Growing market 

Sticking with companies that have robust competitive advantages, I would also acquire Nvidia (NASDAQ: NVDA). 

The organisation is one of the world’s most prominent designers and producers of high-performance computer processors. The demand for these is exploding as the market for digital services also explodes. 

Nivida is reaping the benefits of this market expansion. The company’s net income lept 84% year-on-year in the third quarter. The organisation reinvests virtually all of its income back into processor development.

This spending only helps reinforce the group’s leading position in the market. As long as the firm continues with this strategy, I reckon its growth should also continue. 

Challenges it could face going forward include the supply chain crisis and rising input costs, which may increase the costs for consumers. 

Market maker 

I also think Goldman Sachs (NYSE: GS) is one of the best stocks to buy in the US today. I would acquire the shares because the company has an unrivalled franchise in the US equity markets.

The investment bank is one of the most recognisable brands on Wall Street. It manages the wealth of the rich and famous through its wealth management arm. This brings in a steady stream of recurring income. 

At the same time, the group has a leading position in the market for taking companies public. Over the past two years, this division has been a healthy profit centre for the organisation. 

Thanks to its position in these two markets, I think Goldman has a definite competitive advantage, although this is a competitive business. Keeping customers happy is one of the main challenges the business faces, or they could move to rivals.

The post My top 3 US stocks to buy appeared first on The Motley Fool UK.

No points for guessing the reason for the stock market rally though. The US’s election polls had global stock markets on tenterhooks for much of last week and the rally was initially driven by Biden’s win. Pfizer’s successful coronavirus vaccine has also added to huge investor relief.

What the ‘Biden bounce’ means for the FTSE 100

Both imply that the worst is over for stock markets. Uncertainty around the US’s political future was moving them sideways and Covid-19, of course, had sent businesses across the world in the doldrums. The US economy was expected to show healthy growth in 2021, but forecasters like Goldman Sachs said that a Biden win would improve growth prospects even more.

I think companies with a strong US market stand to gain. Recently, I wrote about how the Irish construction firm CRH could be a big gainer in time. There are at least two more stocks in this category. One is Ashtead, the FTSE 100 industrial equipment rental company. More than half its revenues come from the US.

Another is the FTSE 100 luxury brand, Burberry. It will get a double boost in demand from a Chinese bounceback and now the US. The US accounts for a smaller, but still substantial 23%, share in its revenues.

FTSE 250 stocks to consider

In a similar vein, I’d now consider buying the beleaguered fashion brand and retailer Ted Baker. After a reset following last year’s fiasco, the company has been struggling like many others in 2020. However, with 30% of its sales generated in North America, the tide may be about to turn for it.

I’m also hopeful about Cineworld, which has a strong US presence too. Its share price has already bounced back, with a very likely shot in the arm from the Pfizer news.  

FTSE 100 stocks I’d avoid now

FTSE 100 precious metals giant Polymetal International, on the other hand, has weaker prospects in my view than earlier. The reasoning is straightforward. Precious metal stocks have rallied this year on macro-economic and financial markets uncertainty. With some stability back, I reckon the gold price’s rise will slow down. This, in turn, will impact gold stocks. 

It doesn’t mean that all will be lost for them. POLY, for instance, showed strong revenue growth even before the gold price rally. But if the price of gold is the sole reason for buying the stock, I’d think it through first.

I’d think similarly about Fresnillo, another FTSE 100 precious metals miner. It may not have lost its lustre, but it is probably dimmed for now. If Pfizer’s vaccine news turns out less positive than is now suggested, there could be a bounce-back in gold stocks. Over time though, I reckon their growth will temper.

The post Stock market rally: Biden win lifts the FTSE 100 to 3-month high. I’d buy these stocks now appeared first on The Motley Fool UK.

Royal Mail share price

Source: Google Finance

The rally in the middle of August could have been due to the overall optimism of Footsie investors. However, the Royal Mail stock outperformed the broader index. It climbed from around 180p to 217p in less than a week. But as of the time of writing, the shares are trading for around 172p. 

So, what does the future have in store for Royal Mail? Well, Goldman Sachs, one of the largest investment banks in the world, predicts a share price of 230p. But do the fundamentals signal a strong buy?

Royal Mail fundamentals

My colleague Edward Sheldon wrote a wonderful article on the company’s earnings results. No doubt, they were quite discouraging. Royal Mail was definitely among the companies to suffer from Covid-19. One of the reasons was the substantial decline in the volume of letters sent. But after having studied the company’s results in a bit more detail, I realised there was also a one-time factor. Royal Mail is enjoying higher demand for parcel deliveries with all this internet shopping we are doing. Here’s an excerpt from the financial report: “Parcel volumes up 2 per cent, lower than expected, due to threat of industrial action (Q3) and impact of COVID-19 on international import volumes (Q4). Parcel revenue up 4.6 per cent, due to targeted pricing actions“.

All that doesn’t look nice. But it seems to me that the threat of industrial action was rather a one-off. So, the next time the company reports earnings, we will see a rise in the revenue from parcels delivered, I think. Although many coronavirus-related restrictions were cancelled, it looks like many lockdown habits are here to stay. People still like to order online. This means that Royal Mail’s customer behaviour patterns will probably stay unchanged for a while. But it also looks like the lower revenue streams from letter deliveries are also here to stay.

The company’s management admits Royal Mail is unlikely to be profitable in 2020–21. What’s more, its shareholders won’t receive any dividends. But the management took very important steps to increase efficiency. First, it adjusted the working process in a way to cope with the coronavirus reality we are in, including social distancing measures. But most importantly, the company took steps to get “leaner and fitter“. Not only does Royal Mail plan to make some of its non-functional higher level employees redundant, it’s also going to cut its capital expenditure. Although job losses always have bad social consequences, these cost reductions are clearly positive for Royal Mail’s financial health. On top of that, its cash pile totals £1.9bn, which management predicts will still be large in 2020–21.  

Here’s what I’d do

Although Royal Mail is clearly a large company with a brilliant past, I wouldn’t buy its shares just yet. I think an investor has to be patient and indifferent to market moves in order to buy the stock. In my view, a defensive investor would be far better off picking shares from The Motley Fool’s epic catalogue of exclusive reports. 

The post Are Royal Mail shares a brilliant buy after the correction? appeared first on The Motley Fool UK.