How To Buy Stocks Like Buffett

David Goodboy's picture

Thursday, November 10, 2016 - 11:30am

by David Goodboy

Bargain-basement and Warren Buffett are four words that are rarely, if ever, used together. Although Warren is best known for the value investment philosophy, the bargain stocks he chooses often remain relatively high-priced for the average investor. Despite being bargains, the high average stock prices for his picks makes it difficult for the average investor to build a properly diversified portfolio by following his picks. 

Remember, Mr. Buffett's holding company Berkshire Hathaway (NYSE: BRK-A) is currently the most expensive stock on the New York Stock Exchange at $222,490.00 per share! Berkshire Hathaway wholly owns value companies like GEICO, NetJets, and Fruit of the Loom. It even holds a partial interest in Coca-Cola (NYSE: KO) and Restaurant Brands International (NYSE: QSR). 

Fortunately, one does not have to buy Berkshire Hathaway shares or even value stocks priced $20.00 or more per share to invest like Warren Buffett. 

I have identified two stocks that fit with Warren Buffett's value philosophy trading for less than $5.00 per share. These low-priced value stocks allow even novice investors to build a value-stock portfolio.

Buffett's Investment Philosophy
Warren Buffett became one of the world's wealthiest people by adhering to the simple philosophy of value investing.

The goal of value investing is to locate shares that are trading for less than their intrinsic value. Value investors focus on stocks that have bullish fundamentals but share prices that don't yet adequately reflect those fundamentals. The idea is that price will catch up to the actual or intrinsic value of the company, creating profits for the value investor.

The primary distinction in the value investor's philosophy is the difference between price and value. 

Value is the intrinsic worth of the company. Companies with long track records, solid fundamental metrics, and popular products or services likely possess a high intrinsic value. Price, on the other hand, is simply the value the market has assigned an asset. 

However, it is critical to note that when searching for real bargain-basement value stocks, the fundamental metrics may not be ideal. Once a stock slips to $5.00 or below, the present fundamental picture will likely be questionable. In these instances, the bargain-basement value investor will look at pending catalysts that have a high probability of improving the fundamental metrics.

It's also important to note that corporations with high stock prices but less than stellar fundamental numbers are not value companies. High-tech shares, and especially many internet firms' shares, are not value shares.  

Buffett advises investors to think about each stock purchase as if you are buying the entire company and not just shares of stock. Viewing the business as an actual owner enables the value investor to look past day to day price changes and market volatility. Remember, with this method you are buying into the stock for the long-term, not a quick profit. 

Here Are Two Bargain Basement Value Stocks

Supervalu (NYSE: SVU)
Trading near the lows of its 52-week range, this appropriately named supermarket chain is truly a super value for bargain-basement Buffetts. 

Wall Street seems to have discounted the share price to such a degree that even a value-enhancing spinoff resulted in the share price moving lower. The company sold Save-A-Lot for just under $1.4 billion with the deal expected to close by the end of January 2017.

Make no mistake, Supervalu's balance sheet is hefty with debt. However, the company plans to use the proceeds of the sale to substantially lighten the debt load. There is a mandatory payment of $750 million, but SVU may also pay down an additional $50 to $100 million of the debt. 

Combine this debt reduction, and likely use of the remaining proceeds to enhance growth, with a substantial long-term supply contract with distributor The Fresh Market, and you have an under-priced value stock in the making. 

Risks To Consider: The company will still have high debt even after the mandatory payoff, and competition is fierce in the space. 

Action To Take: The $4.00 per share level is long-term technical support on the weekly price chart. Buy the shares now in the $4.10 zone with initial stops at $3.25 per share and a long-term target price of $8.00 per share.

AK Steel (NYSE: AKS)
Shares of this steel company rallied to a high just above $7.00 per share from February to August this year. Since then, price dropped back into the $4.00 per share zone before rallying into the $6.70 per share area, where it remains today. 

Powered by low raw material costs and infrastructure improvement demand, the company is poised to move sharply higher from the current trading zone. 

Add in the fact that the company crushed third-quarter profit estimates with a net income of 21 cents per share against an average estimate of 13 cents per share and it reveals another bargain-basement value stock.

Risks To Consider: The steel business is cyclical and dependent on a growing economy. Unexpected economic pressures could negatively affect the shares.

Action To Take: Enter long on an upside break of $5.50 per share. Initial stops are suggested at $3.93 per share, and my target price is $9.00 per share.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.