As I’ve been building my portfolio over the years, I have found it difficult to think of new investment ideas. I often experiment with new strategies, filters, and techniques, yet there are times when my mind is blank. In those circumstances, I tend to turn to the investors that first inspired me. Trying to follow the approach of history’s greatest investors allows me to come up with new opportunities, and get back on track.
The Buffett approach
In this instance, I have decided to once again come back to the legendary value investor, Warren Buffett. He is one of the most successful investors of all time, and after amassing a fortune of over $100 billion, it isn’t hard to see why. Despite this success, Buffett’s main investment strategy is quite simple. He is an advocate for buying cheap stocks, holding these for the long term, and steadily growing the position until the market prices the company correctly.
Of course, this is an oversimplification, and finding the right opportunity does take time. I like to think of it in a similar way to fishing, and how a core part of that activity is the waiting. When applied to investing, I use an index filter to scan for the potential opportunity, then sit back and wait until I get a ‘bite’. This approach does require a lot of discipline and patience. I want to wait for the wider market to neglect a great company, as this will allow me to buy it for a discounted price.
My latest find
A prime example of this style is Future (LSE: FUTR), a media and publishing company. This is a stock that has performed fantastically over the last few years, frequently achieving triple-digit returns. But in 2022 things appear to have changed, with the share price down 64%. This is a big change to the 120.4% return achieved in 2021 and has resulted in a price-to-earnings (P/E) ratio of just 10.4.
Despite this considerable correction, the underlying fundamentals are very impressive. Profit margins, cash generation, and return on capital employed (ROCE) are all exceeding their three-year averages. Also, the forecast performance is extremely encouraging, with turnover expected to increase by 35%, and bottom-line profits by almost 90%. These strong characteristics are certainly not being reflected in the share price, given the reversal this year.
It is important for me to not overlook some of the less appealing factors. The level of debt has increased significantly, reaching 33% of market capitalisation. This is much higher than the three-year average of just 5.4%. Also, the current dividend yield of 0.2% is not particularly enticing, even when factoring in the expected dividend growth of around 18% in 2023.
Nonetheless, I think Future represents a typical Buffett-style investment. It is a company with strong fundamentals, and a reasonable valuation, which is currently being ignored by the wider market. For that reason, I would be keen to add the company to my portfolio once I get the necessary funds.