What are the three most important words in value investing?
If you asked Warren Buffett, the billionaire investor who now has a personal net worth of about US$72 billion according to Forbes magazine, he'd probably say,
"Margin of safety"
It's always possible for any stock to fall suddenly in price, so if you haven't built in a price buffer to protect yourself and pay top dollar for a seemingly hot stock, your investment could suffer. Ideally, you want to wait for the market to offer to sell you "a dollar for seventy cents".
When a good stock falls in price, the quality of the company behind it is like the insurance policy that eventually the share price will recover and give you a bigger return. The less you pay less, the higher return you get.
Right now, these three stocks are at relatively low prices compared to the earnings they could achieve.
National Australia Bank Ltd (ASX: NAB) is steadily separating itself from the poorly performing UK businesses it acquired before the GFC. They have been a drag on the Australian earnings, so once that weight is lifted, the value of its domestic business can drive the share price higher. Good growth is forecast and in the meantime the stock pays a fat 5.3% fully franked yield. That combination could make for satisfying income for yield investors.
The glove and protective wear producer Ansell Limited (ASX: ANN) might not sound like an exciting company, but the forecast 20% annual earnings growth makes it a lot more interesting. It just announced the acquisition of a UK protective wear company and this follows a similar buyout in 2014. Acquisitions are driving Ansell's earnings and could possibly keep your returns healthy as well.
Super Retail Group Ltd (ASX: SUL) has recovered in share price due to improving sales figures, but overall retail trade is still anaemic. The specialty retailer, which operates Supercheap Auto, Rebel Sports, BCF and Amart Sports, has been reducing operating costs and developing two new distribution centres to improve profit margins. That can be just as important as increasing sales. Earnings can quietly grow, so now may be the time to add it to your portfolio.
