I’ve been inspired by Warren Buffett, the renowned value investor, from the very beginning of my investment journey. His strategy of buying cheap, holding for the long term and consequently outperforming has always been an intriguingly simple approach.
Despite this, it’s challenging to implement it, as selecting the right stocks is crucial. I’ve found that waiting for the right opportunity requires discipline and patience. This occurs when the market neglects high-quality companies. It means a current share price no longer reflects the value of a business.
The Buffett strategy
Due to the research-heavy initial approach used by Buffett, this isn’t the most exciting form of investing. And once a high-quality company is identified, I must resist the urge to buy until the price is out of step with its strong fundamentals.
For this reason, I like automating this process of finding and assessing a Buffett-style company using market screeners. This will notify me when a company with the characteristics I want enters a suitable price range.
My Warren Buffett-inspired filter has highlighted Computacenter (LSE: CCC) as a potential opportunity. The company is an IT infrastructure services provider. Its share price has grown rapidly over the last few years, rising from pre-pandemic levels. However, this momentum has faltered, with the price down 36.2% this year.
Within my filter, I’m looking for companies with high earnings efficiency levels and reasonable cash generation. This is undoubtedly the case with Computacenter, as it has impressive earnings efficiency on invested capital and a solid ability to generate cash from operations. In addition, I want companies to have relatively low borrowing levels. That’s another tick for Computacenter. Its current debt level is just 9% of market capitalisation, below the three-year average of 10.5%.
Dividend earning potential
In addition, the company is paying a dividend yield of 3.6%, which is forecast to reach 3.7% next year. It has also paid a dividend consistently for the last 24 years and has grown it for the previous two after reducing the yield in 2020. This is very encouraging as consistent dividends are a core requirement for Warren Buffett.
But it’s important to note that the recent poor share price performance may be somewhat justified. A fall of 8.1% in turnover is forecast for next year, considerably below the average growth of 15.6% over the last three years. In addition, profit margins are relatively low at just 3.8%, so this is important to watch if expenses start to grow.
Nonetheless, the company represents an attractive long-term investment opportunity and aligns with the Warren Buffett investing style. However, for now I’m keen to monitor it over the next few months. I’d like to add it to my portfolio next year once I have the necessary funds.
The post Why I’d buy this stock in 2023 using Warren Buffett’s advice appeared first on The Motley Fool UK.
Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022