Three Undervalued High-Quality Stocks
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been proven over and over through the decades: buying solid companies when they are going through a rough patch and valuations are attractive is one of the most rewarding investment strategies an investor can apply over the long term. It´s easier said than done, that´s for sure, since short term volatility or negative coverage from the media can sometimes make the strategy hard to implement from a psychological point of view.
That´s why it’s essential to deeply understand the companies you are buying and their long term business soundness; if you are going to invest against the herd, you need a strong conviction about the stocks in your portfolio.
Nothing inspires confidence as a long track record of managerial excellence and extraordinary returns for investors. That´s why Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) looks like one outstanding company to consider for the long haul. The company owns a diversified collection of high quality businesses in different industries, and those companies have been selected by Warren Buffett himself, arguably the best investor ever alive
The market has been getting increasingly concerned about the future of the company after Buffett. He's not planning to go anywhere anytime soon, but the Oracle of Omaha is not getting any younger either. Uncertainty regarding Buffett´s succession has produced a record low market valuation for the company, as Berkshire briefly traded below 1.1 in terms of Price to Book Value last year.
When that happened, Buffett announced that Berkshire would buy back stock if it remained below that level, so the shares quickly moved above a P/BV ratio of 1.1. However, at a ratio of 1.17 the stock is not too far away from that level nowadays. As the company´s book value rises over time, downside risk seems to be contained by the possibility of a buyback, and there is plenty of upside potential once the market comes to realize that Berkshire will still be a great company even without Buffett. Uncle Warren won´t be around forever, but Berkshire and its outstanding collection of high quality businesses can remain strong for decades.
The auto industry is as tough as it gets: cyclical demand, high fixed costs, and a very competitive environment. But none of that means that companies can´t improve if they make the right decisions, and Ford (NYSE: F) is a living proof about that. The company has successfully revamped its Fiesta, Focus, Fusion, and Taurus models, demonstrating to the public that it can build better and more fuel efficient vehicles.
Ford recently resumed its dividend and received an investment-grade credit rating from major rating agencies, so better products are being translated to improving financial figures. The company is ahead of its biggest domestic competitor, General Motors (NYSE: GM), when it comes to the use of common vehicle platforms, which is a great strategy to reduce costs and maximize economies of scale.
Ford has been steadily improving its operations and finances over the last years, but the stock is still quite cheap at a forward P/E below 6.7 and paying a dividend yield of 2.1%. Macroeconomic concerns seem to be the main factor behind this cheapness, but these kinds of things come and go as the economy has its cycles. Ford, on the other hand, is on a steady way to improvement.
A more conservative bet among cheap high quality companies may be Johnson & Johnson (NYSE: JNJ). This giant in the global healthcare industry will be facing some challenges in the middle term like product recalls, patent losses and potential litigations over some important products. Perhaps for that reason, the company is trading at a record high dividend yield of 3.5%
But Johnson & Johnson is a very solid company, owning many market-leading products in areas like pharmaceutical, medical devices, diagnostics and consumer products. The company has increased dividends for 49 consecutive years, even through recessions, financial crisis and all kinds of company-specific problems. This rock-solid dividend is a welcome reward for patient investors willing to buy Johnson and Johnson in times of negativity and hold their position until the market overcomes its fears regarding the company´s short term difficulties.
There is usually a reason why stocks become undervalued, but investors can profit from these situations by focusing their attention on the long term fundamentals of the business as opposed to the short term uncertainties surrounding the company. After all, we all know that high quality companies purchased at attractive valuations are usually great investments; patience and conviction are the necessary traits once such opportunities have been found.
acardenal owns shares of Berkshire Hathaway and Ford. The Motley Fool owns shares of Berkshire Hathaway, Ford, and Johnson & Johnson. Motley Fool newsletter services recommend Berkshire Hathaway, Ford, General Motors Company, and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.