We would all like our investments to perform like those of Berkshire Hathaway Chief Executive Warren Buffett.
Berkshire (BRK.A) (BRK.B) shares have jumped 1,386% going back to 1996, more than 2 1/2 times the gain of 500% for the S&P 500, according to Morningstar.
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Morningstar investment specialist Susan Dziubinski sums up Buffett’s strategy as follows.
- “Buy businesses, not stocks. In other words, think like a business owner, not someone who owns a piece of paper (or these days, a digital trade confirmation).
- “Look for companies with competitive advantages that can be maintained, or economic moats. Firms that can successfully fend off competitors have a better chance of increasing intrinsic value over time.
- “Focus on long-term intrinsic value, not short-term earnings. What matters is how much cash a company can generate for its owners in the future. Therefore, value companies using a discounted cash flow analysis.
- “Demand a margin of safety. Future cash flows are, by their nature, uncertain. To compensate for that uncertainty, always buy companies for less than their intrinsic values.
"Be patient. Investing isn’t about instant gratification; it’s about long-term success.”
Of course all this is easier said than done. And even if you do follow all these rules, there’s no guarantee you’ll end up with a portfolio that outperforms the broad market indexes.
Despite his amazing long-term track record, the Oracle of Omaha at times has underperformed the market for extended periods.
If you’re thinking of mimicking some of Buffett’s moves, many of the stocks he owned as of Dec. 31 were overvalued, according to Morningstar’s estimates.
But here are three that Morningstar analysts view as substantially undervalued.
General Motors (GM)
Morningstar analyst David Whiston assigns the company no moat (competitive advantage) and puts fair value for the stock at $78, twice recently trades at $38.90.
“We see General Motors with a competitive lineup in all segments it competes in, combined with a reduced cost base, finally enabling it to have the scale to match its size,” he wrote in a commentary. “GM's earnings potential is excellent.”
Citigroup (C)
Morningstar analyst Eric Compton gives the company no moat and puts fair value for the stock at $75. That's 50% up from recently trades at $50.
“Citigroup is in the middle of a major turnaround and remains a complex story,” he wrote in a commentary. “The bank is working through consent orders from regulators, selling off its international consumer operations, and refocusing on its wealth unit.”
Kraft Heinz (KHC)
Morningstar analyst Erin Lash assigns the company no moat. She puts fair value for the stock at $52. It recently traded at $39.60, a third below fair value.
“We think recent [strong] performance, which came in the face of pronounced inflationary pressure and supply-chain disruptions, is a byproduct of the firm’s astute focus since Chief Executive Miguel Patricio took the helm in mid-2019,” Lash wrote in a commentary.
The author of this story owns shares of Kraft Heinz.
