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Legendary American investor Warren Buffett has only one British share in its Berkshire Hathaway portfolio – that’s it Diageo. Probably not the best advertisement for the FTSE 100. But I think Buffett might be missing out on some opportunities by avoiding UK-listed stocks.
Maybe this is my chance to top the billionaire investor.
Buffett’s strategy
The so-called Oracle of Omaha uses a value investment strategy. Such strategies have consistently outperformed the index over the last century. Value investing involves selecting stocks that are trading for less than their intrinsic or book value.
As such, Buffett is focused on buying undervalued stocks. That’s not the same as companies that look cheap because they’re less expensive than they were a year ago.
Finding undervalued stocks requires research. Investors using the value investing strategy run models and compare short-term metrics to create a better understanding of a company’s value.
Invest in value on the FTSE
Buffett once said: “A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful..”
Well looking at the FTSE 350, it is clear that many investors are afraid. The index is up 1% in one year and only 5% in five years.
It is important to note that some parts of the index are rising, namely resources and energy, while other parts of the market have suffered. Home construction, banking, retail and travel stocks are among the worst performing sectors.
While the macroeconomic outlook in the UK plays a role in this, some UK stocks have been unpopular for a while. Investment has generally slowed since the Brexit vote, as our exit from the EU is expected to have reduced the nation’s growth prospects.
However, in a gloomy market, I argue that we have a good chance of finding undervalued stocks.
quality picks
Buffett often says that he would rather pay a fair price for a great company than a great price for a fair company.
But right now on the FTSE I think there are a lot of blue chip stocks trading at a discount. two are lloyds and barclays. Discounted cash flow models suggest they are undervalued by as much as 60% and 70%, respectively.
Banks naturally reflect the health of the economy and recessions, such as the one predicted in the UK, mean more bad debts and impairment costs. However, conditions are a little different right now, with interest rates at levels not seen in more than a decade. These fees are causing revenue to increase.
There are other quality companies in the FTSE 100 trading at attractive discounts at the moment, including legal and general and GSK.
These companies would likely receive a boost from a general improvement in the UK’s macroeconomic outlook. I hope this happens.
more bargains
I’m also looking at shares in the burgeoning UK renewable energy industry. one of them is Greencoat UK Wind which is trading at a 5.1% discount to its NAV and has a price-earnings ratio of around 7.5. It also offers a dividend yield of 4.8%.
In the short term, its development could be slowed by the electricity tax, but in the long term, I expect it to flourish.
I have recently bought shares in all of the aforementioned companies. But with the discounts in mind, I’m looking to buy more.
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