Warren Buffett is the world's greatest investor, worth more than $US 60 billion.
I doubt he would buy Wesfarmers Ltd (ASX: WES) at today's share price.
You see, Buffett has a knack for buying great businesses at great prices.
It's as simple as it sounds.
As his partner Charlie Munger told the BBC a few years ago, the duo has a simple four-point checklist for picking great investments.
Here it is…
The Buffett-Munger Checklist
- They only buy businesses they are capable of understanding. This relates to Buffett's idea of a 'circle of competence'. If you invest in something which you are not capable of understanding it is speculation — not investing. As the owner of Coles, Bunnings Warehouse, Target, Kmart and Officeworks, I think Buffett could understand Wesfarmers very easily.
- The business must have a durable competitive advantage. This is a characteristic of a business that makes it able to withstand sustained competition. Personally, I think this is the hardest part of the Buffett-Munger checklist.
Ask yourself: Coles, Kmart and Bunnings are leaders in their industries, sure, but are they so dominant that they can withstand heightened levels of competition and become more profitable? I'd say Wesfarmers has a competitive advantage, I'm just not sure it is durable.
- Management must have integrity and talent. These are two great traits of any person, but they are very valuable for a CEO. I think the current Wesfarmers CEO, Richard Goyder, fits the bill. He has been in the role a long time and — most importantly — he introduced the sausage sizzle to Bunnings! That's talent! Incoming CEO Rob Scott is also well credentialled but yet to prove himself in the top job.
- "The price must make sense", as Munger puts it. Basically, the duo believes "no company is worth an infinite price." Earlier this week, Buffett put it a little more eloquently in his letter to shareholders when he wrote, "what is smart at one price is stupid at another."
I think this step is where Wesfarmers falls down as an investment. I think Wesfarmers shares currently trade around fair value. Meaning, they are not cheap or expensive. According to analysts surveyed by The Wall Street Journal, Wesfarmers shares are worth $43.56 — they currently trade at $42.86.
Foolish Takeaway
Wesfarmers is a clear leader in Australian retail and a business that many people understand. However, its shares are priced to perfection. Therefore, I doubt Buffett would buy in today.
A few years ago, after taking a position in Insurance Australia Group Ltd (ASX: IAG), Buffett said he may be inclined to take a position in an Australian bank. Maybe Commonwealth Bank of Australia (ASX: CBA) or National Australia Bank Ltd. (ASX: NAB) are more appropriate targets?
