2 stocks I would buy straight from Warren Buffett’s playbook
Today I’m looking at two UK stocks that you could say straight out of billionaire investor Warren Buffett’s playbook.
The first is a FTSE 100 company we know he was interested in acquiring. The second, a Small Cap FTSE stock, plows the same furrow of value that Buffett injected $ 6 billion in last year. Here is why I would be happy to buy these two FTSE shares right now.
An archetypal stock of Warren Buffett
In 2017, Kraft Heinz – majority owned by Buffett and private equity giant 3G – made a pig’s ear for a 4,000-a-year takeover approach to Unilever (LSE: ULVR).
It’s easy to see why Buffett loved Unilever. He loves strong brands, reliable cash flow, and a high return on equity (ROE).
Whether that return was measured as net profit or as a modification of Buffett, which he calls “owner’s profit,” Unilever was generating consistently high ROE. And it still is. Over 30% last year.
After the failed Team Buffett approach, Unilever shares hit an all-time high of over 5,000 percent. Lately they’ve traded below 4000%.
Volatile operating environment
There have been well-known issues with global supply chains and cost inflation. And Unilever recently acknowledged that this volatile operating environment is causing them some concern.
The share price could fall further if issues become more severe and / or prolonged than currently envisaged. It would be a risk for my investment. Nonetheless, I see long term value with the lower price than the Kraft Heinz / Buffett 4,000 pa-share drawn on the business.
Buffett looks to the Far East
Last year, Buffett invested $ 6 billion in the Big Five sogo shosha. He took a 5% stake in each. Itochu, Marubéni, Mitsubishi, Mitsui, and Sumitomo are large trading companies with many joint ventures around the world.
They were cheap on their assets. And Buffett also hopes to engage with management on future partnerships and “Opportunities for mutual benefit”.
A small UK investment house that I have long admired, Asset Value Investors (AVI), was one of the first to venture into Japanese value.
Many Japanese companies had accumulated extraordinary amounts of cash (a lingering overreaction to the bursting of Japan’s economic bubble in the 1990s). At the same time, the Japanese government and domestic shareholders were increasingly annoyed by their inefficient use of capital.
AVI has started to take stakes in several of these companies. He also began to engage with management on improving governance and focusing on shareholder value.
In 2018, AVI was so convinced by the depth of value offered in Japan that it launched the AVI Japan Opportunity Trust (LSE: AJOT).
At last calculation, 83% of the overall market capitalization of its portfolio companies was represented by cash and investment securities. Their overall ROE was a modest 9%. But remove cash and relatively unproductive securities, and the ROE was 27%, indicating strong core operating activities.
Of course, AVI is delighted “Has now been joined by a constant stream of investors from around the world identifying and attempting to unlock often extreme value in Japan… notably Warren Buffett buying a portfolio of trading companies.“
AVI Japan has stakes in over 20 companies, but I have to admit that there is a single country risk with geographic confidence like this. Despite the risk, I think the value opportunity here is compelling, although I can see potential high yielding stocks in other markets as well.
GA Chester has no position in any of the stocks mentioned. The Motley Fool UK recommended Unilever. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.