No investor can reasonably hope to replicate the achievements of Warren Buffett, the man recognised as the world’s greatest investor and who stepped down this week as chief executive of Berkshire Hathaway.
It’s an impossible feat for two reasons. An investor won’t have his advantage of timing — Buffett, remember, started out as a “cigar-butt investor”, buying mispriced shares where a company’s valuation is below the real worth of its assets. This was possible back in the 1950s and 60s, but not so easy now when prices and shares are pored over to the nth degree. Modern investors also lack access to Buffett’s source of ultra-cheap loans (his insurance companies’ premiums) which allowed him to leverage up when buying a business.
But investors can replicate his cleverness in another way — by using his investment principles and philosophy in their portfolio decisions. Buffett himself learnt a lot from his teacher at Columbia Business School, Benjamin Graham, widely known as the “father of value investing”.
One of Buffett’s most important lessons is to view companies as businesses rather than shares. A share’s value is often led by sentiment and will rise when the market is feeling bullish and be punished when the market is disappointed, for example by unsatisfactory forward guidance.
But if you see yourself as a part-owner of a business — and Buffett advised investors to consider themselves as the owner of the whole business even if they only owned a tiny bit — your perspective changes. It will underline the long-term nature of your purchase, and therefore guide your research. Is this a quality company and what makes it so?
Consider how the company has performed across different cycles, its profitability, its return on equity, its earnings health and ability to grow them, and its debt levels. Look at how it compares with competitors. What is its economic moat — such as a famous brand — and is it well managed?
Identifying quality isn’t enough. What also matters is the price you pay. Buffett always considered a company’s intrinsic value and he liked it to be obvious. One way of establishing a company’s intrinsic value is through discounted cash flow modelling: how much cash will the company return to you in the coming years and how much money is that worth now? You should also look for a margin of safety so that the price you pay is even below this intrinsic value.
Be patient. If you have found a great company but the valuation is sky-high, wait and buy when the price is fair. Buffett bought his longtime favourite businesses, the “wonderful” American Express and Coca-Cola when both companies were struggling.
Hold for the long term. Famous Buffett quotes include “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes” and “our favourite holding period is forever”. Sticking with your investment through thick or thin (“be greedy when others are fearful”) allows your investment to compound in value. This follows on naturally from becoming a part-owner of the business you have invested in, but this doesn’t mean never selling. If you’ve bought badly or missed a serious problem at the company, sell — as Buffett did with Tesco.
Buffett famously stayed away from tech stocks in the early days because he did not understand what they did. But he bought Apple because he recognised that it sold products everyone wanted. If you understand what a business does because you work in the same sector — say pharmaceuticals or fintech — you’ll be able to better judge if the business truly has a competitive edge.
In a nutshell, look for great businesses at a fair price and hold for the long term. It’s harder than it sounds, but following these principles will take you a long way.
BUY: Trainline (TRN)
Like many of the nation’s commuters, Trainline has found its progress impeded by external forces, writes Michael Fahy.
The company has made good operational progress, with its 12 per cent top-line growth largely the result of a stronger domestic market, as more people book train tickets digitally. Higher UK gross profit was attributed to a reduction in the fulfilment fees it pays to train operators.
Group-wide operating profit grew by 54 per cent to £86mn, as top-line growth improved operational leverage. Operating cash flow also increased by 13 per cent to £154mn, which was mainly used to fund buybacks — it bought back £89mn-worth of shares last year and launched a further £75mn buyback programme last month.
Despite these purchases, Trainline’s shares are down by 38 per cent this year. Investors reacted badly in January to a government consultation document on the industry’s new regulator, Great British Railways, which plans a single ticketing platform of its own.
A warning of issues this year, including the expansion of Transport for London’s contactless charging zone further into the Home Counties and ongoing battles to overcome Google’s search page changes in favour of advertisers, mean management expects sales growth to slow to 6-9 per cent this year.
Trainline’s shares trade at 13 times FactSet consensus earnings which, for a high-margin business that throws off a lot of cash feels too cheap. Concerns about a government-backed competitor are understandable, but Great British Railways itself will not get off the ground before 2027 and when it does there’s no guarantee it will be user-friendly.
HOLD: Smiths News (SNWS)
In a declining print media market, newspaper and magazine distributor Smiths News put in a resilient first-half performance as it improved cash generation and profits, writes Christopher Akers.
The flat revenue performance was supported by price increases, contract wins and a 4 per cent boost for higher-margin football and Pokémon collectibles as volumes fell.
Chief executive Jonathan Bunting said the company had seen volume declines of “anywhere between 8 per cent and 11 per cent”, depending on the product.
Given this context, it is key for future sales visibility that the company has secured 91 per cent of existing publisher revenue streams out to at least 2029.
The market situation also means that fresh growth initiatives are key. The company is pursuing a recycling collection service, looking at new categories such as books and home entertainment, and trialling the delivery of engineering and manufacturing specialist parts to customers. Management sees a £160mn long-term profit opportunity here, although the delivery of even a small slice of this would help.
Adjusted operating profit rose 3 per cent to £19.4mn, a performance helped by £3mn of cost savings. Free cash flow improved from £4.2mn to £13.3mn, year on year.
The balance sheet has gone through significant deleveraging over recent years. The better cash generation in the half was seen in the 91 per cent fall in average bank net debt to £1.1mn (compared with almost £100mn in 2020), although closing net debt was higher.
Smiths News trades at just six times forward consensus earnings. The close to double-digit dividend yield is striking and the 15 per cent year-to-date drop in the share price could be seen as an opportunity. However, long-term market uncertainty keeps us on the sidelines.
HOLD: Card Factory (CARD)
Card Factory delivered a decent set of results last financial year, with revenue and profit growth in line with expectations, writes Michael Fahy.
Like-for-like sales growth of 3.4 per cent was achieved by increasing prices and broadening its product range.
In fact, double-digit increases in sales of confectionery (up 25 per cent), soft toys (20 per cent) and stationery (18 per cent) meant that it sold more gift and celebration items than cards last year. One in every two sales made is now accompanied by a gift or celebrations product, the company said.
Card Factory remains heavily reliant on store sales, though, which make up 93 per cent of total revenue. Online sales were flat at just £8.8mn and the personalised gifting business, gettingpersonal.co.uk, is being wound down after its sales fell by a quarter last year to £4.4mn. More faith is being placed in a partnerships arm that grew sales by 30 per cent, but it is coming from a low base and currently contributes just 4 per cent of group sales.
The stores business has been grappling with higher costs, offsetting wage increases last year through efficiency improvements and a new labour management system. It also undertook a “space optimisation” programme that allowed for more store areas to be assigned to stationery and children’s zones. Still, with £14mn of extra employment costs to absorb following last year’s Budget, costs are expected to rise by 4-5 per cent this year. About 1 per cent could be shaved off through efficiency measures, but the rest will have to be met through increased sales and prices, and margins are expected to be flat.
The company dropped a target set in 2023 of returning its pre-tax profit margin to the pre-pandemic level of 14 per cent by 2027, instead stating that “against the backdrop of significantly higher inflation than expected” it was now targeting a margin in the mid-to-high single-digit range.
A share price fall of 4 per cent might have been steeper if the market had been fully invested in Card Factory’s midterm target, but consensus forecasts were already below this level. Though Card Factory shares now appear to be in bargain basement territory at just over six times earnings, with a forecast dividend yield of 6.8 per cent, it’s hard to disagree with broker Peel Hunt’s assertion that the lack of momentum means there isn’t much cause for a re-rating.
