Would legendary value investor Warren Buffett buy Woolworths Group Ltd (ASX: WOW) shares today? Good question.
Warren Buffett is one of the greatest investors of all time. Over his long lifetime, he has amassed a fortune well north of US$130 billion. He has done so purely by building up the assets of his company, Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B), through savvy buys of quality companies.
Today, Berkshire owns huge stakes in many of the world's best companies, including Apple, Visa, Amazon, Coca-Cola, American Express, Kraft Heinz and Chevron.
Thankfully, Buffett has always been very open about his investing process. In his 2007 letter to the shareholders of Berkshire Hathaway, Buffett outlined four criteria that he typically uses to assess a business's viability as a successful investment:
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%.
When control-type purchases of quality aren't available, though, we are also happy to simply buy small portions of great businesses by way of stock- market purchases. It's better to have a part interest in the Hope Diamond than to own all of a rhinestone…
So, we have something of a checklist to go through.
Would Warren Buffett buy Woolworths shares?
First up, is Woolworths a business Buffett would understand? On that front, Woolworths almost certainly ticks the box. This is not some cutting-edge artificial intelligence (AI) or semiconductor stock. It is a chain of supermarkets and grocery stores – an old-school retailer well within Buffett's traditional circle of competence.
Second, "favorable long-term economics". This one is a little murkier. Sure, Woolworths arguably has some favourable economics, given that it is the market leader in Australia's grocery industry. Australia's population is also growing at a consistent rate, which bodes well for Woolworths' long-term growth.
But Buffett is probably also referring to a company's moat here or its protections against the competition. On that front, Woolworths' quality as a business is a little more ambiguous. I would assess Woolworths' moat as a narrow one. Sure, it has a respected and powerful brand. But at the end of the day, the company's ability to consistently offer its products at cheaper prices than its rivals is debatable.
Recently, Woolies has been losing market share to rivals like Coles Group Ltd (ASX: COL) and Aldi, so Buffett might not regard the company's 'long-term economics' as sufficiently compelling to warrant a buy.
Warren Buffett's checklist
Thirdly, we have able and trustworthy management. Woolies may have been burned somewhat by the abruptly-announced departure of long-term CEO Bradford Banducci earlier this year.
But overall, there doesn't appear to be any debate about whether the Woolworths management team is anything but able, competent, and trustworthy, as it currently stands.
Finally, let's talk about price. This is the hurdle that might prevent Woolworths from appearing on Buffett's radar.
Earlier this month, we discussed how a recent rally in the Woolworths share price has resulted in the company's price-to-earnings (P/E) ratio rising from 20.2 in May to around 23 by July. Brokers are currently estimating that the company has a forward P/E ratio of 26.
That's not breathtakingly expensive, but it's also arguably not even close to cheap, especially for a large, mature company with modest growth potential.
Buffett likes to buy companies when everyone else is selling. Right now, Woolworths shares can't be described as oversold by even the most optimistic investors.
Foolish takeaway
Buffett once said that he likes to look for six-inch bars to step over when looking for the right stocks, not six-foot bars. Woolworths doesn't quite look like a six-foot bar today, but it also arguably doesn't resemble a six-inch one.
Buffett is very particular about his investments, and while I think he wouldn't disregard Woolworths shares straight away, I don't see him buying this company at its current pricing.
