I think Warren Buffett would wait for a more compelling valuation before buying Woolworths Limited (ASX: WOW) shares.
Woolies: A Buffett stock?
Warren Buffett is the world's greatest investor. With the help of his partner Charlie Munger, Buffett's Berkshire Hathaway returned an incredible 20.8% per year on average over the 51 years to 2016.
In addition to devoting himself to exceptional long-term investment returns for stockholders, Buffett — and to a lesser extent, Munger — continues to educate other investors.
In 2009, during the fallout of the Global Financial Crisis, Munger gave viewers of the BBC an insight into his and Buffett's investing strategy. Like always, they keep things simple and focus on four key features of an investment.
Here's how Woolworths fits into the four-point checklist…
- They must be capable of understanding the business.
Woolworths is Australia's leading supermarket business. Along with Coles and Aldi, Woolies has a presence right around Australia. It also owns Big W and hotels/pubs.
I think Buffett and Munger could easily understand Woolies, so it ticks this box.
- The company must have a durable competitive advantage.
Also known as a moat, a durable competitive advantage allows a company to earn returns in excess of its cost of capital for a longer period of time. In other words, the business is able to withstand heightened competition and cyclical effects to produce better-than-average returns for shareholders.
Unfortunately, while Woolworths has a competitive advantage I do not believe it is durable. I think the aggressive growth of Aldi and its stoush with Coles will see Woolworths' profit margins continue to fall.
- Management must have integrity and talent.
Put simply, you want good people in the right places to ensure you get the most from your investment.
Woolworths has an experienced management team and is well resourced.
- The price must make sense.
Buffett and Munger use the present value of cash flows to determine the worth of a business. Buffett has said that he would rather buy a wonderful business at a fair price than a fair business at a wonderful price. When you're investing for the long-term it makes sense to reserve your portfolio for only the best companies.
At today's prices, Woolworths shares are too expensive for my liking. While a great investor like Buffett might see value in it, I cannot see enough value at its current market price to justify a buy rating.
Foolish Takeaway
As much as investors and analysts love to complicate things, it's Buffett's ability to keep things simple that has enabled him to grow his wealth exponentially over time.
