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| (Photo credit: Aaron Friedman) |
Chicago, May.13, stock advice .- The "Oracle of Omaha" and "America's Greatest Investor" are well-earned nicknames for the renowned Warren Buffett.
Through a long and storied track record of success, he's created billions in value for himself and his shareholders.
The heart of his investing strategy has been remarkably consistent. He seeks out undervalued assets -- things the market shies away from -- with "boring railroads" and "dead newspapers" being two more recent examples.
As a value investor, Buffett looks to buy companies cheap relative to their book value, with high return-on-equity (ROE) percentages.
Because of his prudence and approach, I'm not the first investor to say he's been one of my heroes through the years.
His style is a stark contrast to the day and age in which we live. It seems that investors want to play the momentum game of "buy high, sell higher." That's dangerous to do over time -- just ask all of the people who were flipping houses and got caught when the real estate bubble popped.
However, Buffett has never been tempted to play this casino game. He thinks of investing as buying a company (or a piece of a company) via the stock market. He focuses on what the value of the company is and not just the price at which a stock trades in the market.
Learning his approach taught me how to properly analyze a stock from a fundamental perspective. That's important, considering that a number of companies that the stock market falls in love with are not fundamentally sound at all.
Take for example Amazon.com, (Nasdaq: AMZN). Yes, we all know that they're the world's largest online retailer and can offer thousands of new and used products like books and toys that you just can't get in stores. And unlike most of the other dot-com companies that went belly-up when the tech bubble burst, it's been one of the few to not only survive, but thrive.
But right now, the market is valuing the company at over $113 billion -- and it isn't even reporting a profit right now! While the company is expected to start making money again, it could still trade at over 70 times earnings. Given their slowing growth, it's tough to see why the company should trade at such a huge premium to the overall market.
And on the other hand, there are other stocks that the market doesn't view as being very attractive which are fundamentally very sound.
Take for example Brazilian mining firm Vale (NYSE: VALE), which has suffered on two fronts. Brazil used to be a hot territory for emerging market investors, until it decided to cut back on foreign investment to cool down its heated economy. And, of course, at a time when commodity prices have taken a breather, it's been tough to attract capital in that sector.
But it's a company that trades at 7 times forward earnings, and only a fraction above its book value (Amazon trades at over 13 times book value by comparison). While the market has low expectations, the company has an operating margin of nearly 30 percent and revenue growth is at 6.5 percent, a pretty good number for a commodity-backed business in today's market.
Finally, unlike Amazon, which doesn't pay shareholders to sit through the ups and downs of the market, Vale pays a 4.5 percent dividend yield.
It's counterintuitive to most, but I'd rather have the latter, because in the end, when it comes to your money and mine, there has to be some serious meat and potatoes behind the stock -- not just hype and hot air.
A Portfolio That Buffett Would Envy
Buffett, through fundamental analysis, avoids the hype that causes so many other investors to make bad judgment calls. It doesn't mean that every stock picked in this manner will become profitable, but it does provide an edge in the market because it's a consistent way to size up companies.
Thinking about all this recently led me to look up how the investments I have selected for members of my Ultimate Wealth Report portfolio stack up against the S&P 500, and Warren Buffett's company Berkshire Hathaway (NYSE: BRK-B).
The S&P 500 trades at a P/E in the 18s as of our press date, with a price-to-book ratio of around 2.45 and a dividend yield of about 2%. Berkshire Hathaway's stock (NYSE: BRK-A) is trading at a P/E of 16.8 and a price-to-book ratio of 1.38. Famously, it doesn't pay out a dividend at all. (There's never been a stock split on the Class A shares either, making it the world's most expensive stock at $160,000 per share.)
In comparison, we've bought our stocks at an average P/E of 9.30 with a price-to-book ratio of 1.12 and with an average dividend yield of 3.15 percent.
That means we're buying up companies that are 48 percent cheaper than what Warren Buffett's Berkshire Hathaway is trading at, when looking at its earnings. In addition, we're picking them up 19 percent cheaper when looking at it from the book value perspective.
And, we are getting paid an average 3.15 percent dividend to boot.
Does this mean our stocks can't go down? No. "Good stocks" aren't immune to stock market corrections, but they do come back from these corrections.
Bad stocks, however, sometimes do not come back from major stock market sell-offs. That's the difference.
That's why I never worry about any of the stocks I recommended in my Ultimate Wealth Report, because I know what we've got -- stocks with multibillion-dollar market caps that are hard to compete with, that have low P/E's and low price-to-book ratios, with billions of dollars in earnings, and billions of dollars in cash with low debt loads relative to their size.
These are the cream of the crop, world-dominator stocks that will come through stock market downturns and recessions better than most companies out there, and they are the best place to start looking when building your own "Buffett-style" portfolio. ...
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