When it comes to investing, few names command as much respect and admiration as Warren Buffett.
Known as the Oracle of Omaha, Buffett's investment philosophy centres around value investing, seeking out companies with strong fundamentals, competitive advantages, and capable management teams.
His phenomenal performance over 50 years speaks for itself.
Curious about what Warren Buffett looks for when selecting companies to invest in? I've done the research for you and found some ASX companies that could meet his investment criteria.
Before jumping in, though, a reminder that this is just the first step of the screening process for idea generation purposes. Please remember to do further research before investing your hard-earned money.
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What did Warren Buffett say?
Buffett is known as a value investor, but he really doesn't differentiate value investing from growth investing so much. For him, investing is one process where he allocates his capital to excellent companies selling at reasonable valuations.
Buffett had this to say in his early investment letters:
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.
In determining great businesses, he famously uses the return on capital employed (ROCE) measure. While here he meant ROCE in a true sense — meaning without undue leverage, accounting gimmickry etc — for simplicity, I will just use the reported return on equity (ROE) from the companies.
Based on the above, I've used the following criteria:
- Price-to-earnings (P/E) ratio of below 15x using FY24 earnings estimates from S&P Capital IQ
- Reported ROE of 15% or higher
- Simple business model that even I can understand how they make money
Now, here's the list of three companies that came out of this basic screening process.
BHP Group Ltd (ASX: BHP)
Let's start with a major ASX company that many of us are familiar with: BHP. The mining giant makes its money from producing and selling copper, iron ore, coal and other basic resources across the globe.
While BHP has to endure the cyclical nature of the commodities it mines, the miner is most likely to generate higher revenues and profits in a couple of decades from today.
Based on its financials for the 12 months ending December 2023, BHP boasts an ROE of 19%. Although its ROE tends to fluctuate between single digits and north of 40% throughout the commodities cycle, on average, it generates double-digit ROE.
The BHP share price is traded at just about 11 times based on its FY24 earnings estimates.
Nick Scali Ltd (ASX: NCK)
Next up is furniture maker Nick Scali selling through its Nick Scali and Plush brands.
The company has provided high-quality lounges and other furniture to Australians over decades, and now it is ready to expand its markets to the bigger UK market by acquiring Fabb Furniture.
Although there's nothing too sexy about selling furniture, one of Warren Buffett's famous investments in the past was in Nebraska Furniture Mart, founded in 1937 by a Russian immigrant, Rose Blumkin. Certainly, he doesn't mind boring businesses.
Nick Scali has an astonishing ROE history, hovering around 50%, and the company is trading at a forward P/E ratio of 14 times on FY24 estimates by S&P Cap IQ.
Super Retail Group Ltd (ASX: SUL)
Last on my list is Super Retail Group, a retailer behind popular chains like Super Cheap Auto, Macpac, Rebel and BCF.
As my colleague Sebastian pointed out, its business tends to cope better with economic cycles than other consumer discretionary companies.
Super Retail Group has grown its earnings per share from 70 cents in FY19 to $1.15 in FY23. Even in the challenging business environment, the company reported a solid half-year result, increasing half-year revenues by 3.2%.
Over the last ten years, its ROE has moved between 8% and 27%. According to its half-year FY24 report, it is standing at approximately 20%.
The Super Retail Group shares are trading at a forward P/E ratio of 13 times.
