No investor is perfect. Even famous investors Warren Buffett and Charlie Munger occasionally get caught out on a stock going south.
The latest is the big UK supermarket chain Tesco (LON: TSCO), which has almost halved in share price since May after it was found out earnings were mis-reported to be 250 million pounds higher than they actually were.
Earlier this month, Buffett said: "With Tesco, we definitely made a mistake." His company, Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) had a paper loss of about US$750 million and has since sold down a part of its Tesco shares.
Regardless, the two businessmen keep on stock picking because their successes have vastly outweighed their occasional losses. They can find good earners similar to the stocks below by using a four-step process.
It weeds out average or poor companies to identify the premium ones. The "four filters" are-
1) We must understand the business
2) The company must have enduring competitive advantages
3) The company has able and trustworthy management
4) A margin of safety is built into the share price
In Tesco's case, it looks like Buffett got caught out on #3 with suspicious accounting irregularities. That's not his fault, though.
Here are some quality stocks that Buffett might consider for their standout performance.
The takeaway pizza chain Domino's Pizza Enterprises Ltd. (ASX: DMP) has built up an excellent business most people could understand. Recent business growth has pushed its shares up over 220% in the last two years. Management has done a great job in growing the franchise.
However, with a 50 price-earnings ratio, there isn't much margin of safety in the share price. A good business, yet such a premium to pay. It's better to wait until a sell-off.
SEEK Limited (ASX: SEK) is a good pick that is priced more in line with its growth forecasts. The job search website has a strong competitive advantage from its market-leader status that attracts the majority of job seekers.
It has been a winner for shareholders – up about 140% in the last two years. It will leverage off its Australian success to expand into the highly populated Asian region. This is an attractive growth story that is more reasonably priced.
Lastly, one up-and-coming company with strong prospects is Slater & Gordon Limited (ASX: SGH), the law firm network that specialises in personal injury law. It's had a great two-year stock gain of about 220%. Its business network has grown through regular acquisitions and the company has expanded into the UK as well.
FY 2014 was a fantastic year for earnings growth, up 47% in net profit thanks mostly to the addition of the recent acquisitions. It still has a lot of room to grow in Australia, so this is one you should definitely follow.
All of these companies have proven their outstanding business performance and could be reliable growers for a number of years to come. When a margin of safety in price opens up, I suggest being ready to buy.
