Warren Buffet famously once said "price is what you pay, value is what you get". Referring to the distinction between a company's market value and its intrinsic value, Buffet has used this adage to see his beloved Berkshire Hathaway Inc amass a mind-boggling $102.5 billion share portfolio over time.
Whilst building an empire like Buffet is unlikely to occur for anyone, investors can grow their wealth the simple way by buying stocks going on the cheap.
I believe Countplus Ltd (ASX: CUP) and Freelancer Ltd (ASX: FLN) are two stocks which fit this bill and it just so happens that they're also cheap in dollar terms!
Countplus
Countplus' shares continue to linger below the $1 dollar mark, as weak small and medium enterprises (SME) sector sentiment puts a drag on advisory revenues.
In its 2016 financial year, the company experienced operating revenue decline of 0.9% and an increase to operating expenses of 9.3%. Yet, somehow, it managed to pull off a 41% increase to net profit after tax in the same year.
How is that you ask? The answer – Class Ltd (ASX: CL1).
It's all class
As at 30 June 2016, Countplus held a 5.4% stake in Class – the listed SMSF platform provider. Having the benefit of acquiring this interest in Class at its IPO, Countplus' bottom line enjoyed a whopping $11.4 million fair value gain on its investment in 2016 on the back of Class' stellar success.
Where's the value?
Obviously, Class' growth has now slowed, with Class' shares down 11% this year alone. However, by my calculations, Countplus' interest in Class values its investment at $16.34 million (marked to market). This compares to Countplus' overall market value of $94.8 million.
Accordingly, when a sum-of-the-parts valuation is considered for Countplus, Countplus' price-earnings ratio looks cheaper than when including the investment, meaning investors buying shares at today's prices are receiving the existing business at a discount to its market value. This is something Buffett would pay attention to.
Freelancer
Freelancer is the brainchild of founder and CEO Matt Barrie. It operates an online marketplace allowing individuals to freelance and crowdsource services from one another.
The company listed on the ASX in November 2013 with a bang, opening at $2.50 a share – five times its issue price of 50 cents.
Since then, Freelancer's shares have failed to find direction, whipsawing between 52 cents in November 2014, before rising again to $1.80 in January last year.
During the week, Freelancer's shares entered into a downward trajectory once again, falling below $1 on Friday – the first time in almost two years.
Why the pullback?
The 10% fall in share price since the start of the week coincides with management releasing its fourth quarter results on Tuesday. The company announced it achieved all-time record cash receipts of $51.9 million for the year, up 35% on the prior year. Fourth quarter cash receipts came in at $13 million and paved the way for positive operating cash flow of $4.5 million and an EBITDA profit for the year.
Why buy?
With Freelancer's shares trading under a dollar, $35 million of cash on hand (and no debt to speak of), Freelancer is definitely one stock which looks tempting at today's prices.
Whilst I will be the first to admit that Freelancer's current $450 million-odd market cap makes the company quite expensive on a price-earnings basis, if it's current growth trajectory continues, Freelander's shares could be worth a lot more in the future.
Foolish takeaway
As Buffett can attest – you should never buy a company simply because its share price is low (in absolute dollar values). Even companies which trade in excess of $100 per share, like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) are worth buying if their profit expectations justify their current prices.
Accordingly, savvy investors must always remember the number one rule to building a long-term share portfolio is buying stocks that are priced below their fundamental value today.
In my mind, Countplus and Freelancer are two stocks which could fit that bill.
