Would Buffett Buy These Eight Stocks?

This story features ALUMINA LIMITED, and other companies. For more info SHARE ANALYSIS: AWC

By Peter Switzer, Switzer Report

Would Warren Buffett buy these 8 stocks?

Investing for me is often about thinking ‘outside the square’ and regular readers know I’ve pinned my colours to the mast telling my subscribers that “buying the dip”, when you’re investing in quality assets, is the way to build wealth.

Some of our super fund’s best investments happened a few weeks after the March 23 Coronavirus crash. Even if we were proved wrong, we were buying great businesses for the long term and given the prices we bought at, it wasn’t going to be too terrible if there was another leg down. There were some risky plays perhaps, not suited to the faint-hearted, but we have most of our assets in quality investments so we were up for taking on some risk.

That said, with the magnitude and pace of the response from both the Treasurer and the central bank, it was a pretty good bet that a bounce back was likely for stock prices. Remember the $97 stock Afterpay hit $8.01 in March. And CBA went as low as $53.44. Given that it’s now $80, it tells you that you could have made 50% on one of the best businesses in the world, if you had the right investment attitude and the guts to believe in that investing strategy.

On the weekend, while I was ‘enslaved’ as the labourer in my wife’s grand gardening plan, I used the time valuably to listen to an interview of Warren Buffett with CNBC’s Becky Quick on February 18, when the Dow gave up over 800 points on the futures on its first fears of a COVID-19 pandemic crisis.

Buffett didn’t know how serious this was going to be as it took the World Health Organisation (WHO) until March 11 to call it a pandemic! But the great investor kept telling Becky that he was going to be looking at businesses he wanted to own for 10 years or more at much better prices because of how the market will react to the virus.

He never sounds like a punter trying to pick a good price but more like a cautious, successful buyer eyeing off a property for sale, a retail business on the market or a work of art by an up and coming and increasingly more respected painter.

All this got me thinking about a good story written by the AFR’s William McInnes, who talked to three fund managers to find out what their favourite stocks to do well out of the arrival of a vaccine were. The fundies in question were Leo Barry of Fairview Equity Partners, Daniel Moore of Investors Mutual and Paul Biddle of Celeste Funds Management.

Here are the stocks they liked. And this is what FNArena’s survey of analysts came up with for the “businesses”, as Buffett would call them.

So the Buffett question I want to ask about these stocks is: “Are they businesses I want to hold for the long term?”

Clearly, I’m asking this from the point of view of an investor, not a trader. So let’s get started.

1. Alumina

Alumina looks more like one for the trader rather than the investor. Its five year chart is instructive, making the 9% gain mentioned above likely.

Alumina ((AWC))

In 2018, before the Coronavirus market crash, it traded at a high of $2.88. In February this year, it was $1.94 before crashing to around $1.37. It’s now $1.71. You could perhaps make money in the short term when the vaccine escalates the reopening trade.

“As economic activity recovers, demand from the building and construction and car manufacturing sectors will be supportive of demand for Alumina’s products, and lead to higher prices and earnings,” says Daniel Moore.

I think he’s right but this long-term chart of AWC hardly makes it a Buffett stock for the long hold.

AWC

2. Eagers Automotive ((APE))

AP Eagers isn’t seen as a short-term play, with analysts thinking recent rises have been enough. But will this auto retailers business be a long-term play? “They’re domestic auto retailers. Demand for cars has improved and they’re a large player in the total market,” says Celeste Funds Management portfolio manager, Paul Biddle. “AP Eagers is continuing to consolidate the auto industry and they will have bigger market share coming out of the COVID-induced cycle that they had going into it.” (AFR)

 APE Six Months

This short-term chart shows how the market has warmed to this company with no overseas travel and the increased desire to do ‘drive holidays’ locally. But the long-term story shows that this company has got it right since 2011.

APE since 1988

This looks like a company that Buffett could easily support, though I’d like to buy into it when the market gets negative. That said, I’m not expecting any big sell-off any time soon.

3. ARB Corp ((ARB))

The company ARB is a business supplying products such as bull bars and other accessories for 4-wheel drives, etc. It had a great run out of the GFC. Then it has stabilized around the current share price levels.

ARB

This is another Biddle favourite, which suggests he’s a rev-head or sees the potential for the car industry. I can’t see much upside in the short term, with its share price up nearly 120% since March 16. But I do think this is a Buffett-like stock for the long term.

4. Corporate Travel Management ((CTD))

Corporate Travel Management (CTD) has jumped the gun on the reopening trade. While I liked it in April I’m surprised at the extent of its bounce-back. Its pre-Coronavirus share price was around $22, so with the current price of $19.58, there is likely to be upside as the reopening trade becomes even more believable. But I’m not great believer in this stock. In 2018, it was a $32 stock but it has had management concerns and short-seller attention. This is a stock for trading and would hardly pass the Buffett test on many levels.

Corporate Travel Management six months

5. Event Entertainment and Hospitality ((EVT))

Event Entertainment and Hospitality (EVT) isn’t expected to do much short term, with analysts tipping a 7.7% fall. But what’s its longer-term potential?

The chart below makes this business more interesting and could get a tick from Buffett. Its current price is $10. Before the virus came to town, it was $13. Its previous high was $16.46 (in 2016). The owner of Event Cinemas, QT Hotels, Rydges Hotels and Thredbo Resorts has seen its shares fall sharply yet investors are optimistic of a rebound.  “While all these businesses were affected to varying degrees by COVID-19, we expect them all to bounce back strongly as the economy re-opens and budgets get reallocated from retail goods to travel and experiences,” says Investors Mutual’s Daniel Moore. (AFR)

The company also has a good history of dividend payments, though these will be shot for a year or two.

EVT long-term

6. Lifestyle Communities

Lifestyle Communities isn’t covered by analysts and is not a company I can get a handle on so on my Buffett test, I’m ruling it out.

7. Omni Bridgeway ((OBL))

This is the merged company of IMF Bentham and Omni Bridgeway. It’s a litigation funding business and a lot of court cases have been stopped because of the Coronavirus. This is a trading stock where I’d expect a short-term gain, which is consistent with the analysts’ view of a 30.5% gain.

“Only 1 per cent of jury trials in the US are operating at the moment highlighting that once we see some normalisation in conditions Omni will be a big beneficiary,” says Leo Barry. “Omni operate on global scale so when you talk about reopening trade, the Australian division will be the first to come out of the lockdown.”

The track record of both these companies suggests there’s a lot of potential for this new entity but it would need to prove itself over a longer timeframe before I’d suggest it would pass the Buffett test.

8. Orica ((ORI))

The final company to face the Buffett filter is Orica, which the analysts think has an 11% upside. The company has suffered because of mine shutdowns in Africa and South America but Daniel Moore says: “Despite this, the business has continued to be profitable, and the balance sheet remains very strong.”

ORI long term

A strong economic recovery in 2021 will be good for mining and Orica could be a beneficiary. So I see it as a trading stock, but there are so many variables in mining and those companies dependent on miners have their futures in the laps of the gods.

Buffett isn’t linked to mining companies, though he did shock the market buying gold in August this year, which surprise the watchers of this investing guru.

The Orica chart says this isn’t a bad company but it doesn’t pass the reliable business test that Buffett uses to work out if he wants to own these businesses for a long, long time. Companies such as McDonald’s, Coke and American Express pass his test.

When it comes to businesses for the long term that might get the nod from Warren Buffett, I’d put forward AP Eagers, ARB and Event Entertainment. And at a pinch, Event Entertainment and Hospitality.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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