Does Buffett Style investing work in Australia?
Warren Buffett has said it is far better to “buy a wonderful company at a fair price than a fair company at a wonderful price”. He also likes to say his “favourite holding period is forever”.
But does this work in Australia?
Australia doesn’t have a plethora of global world beating franchises. Our best brands don’t come anywhere near making the top 100. Billabong and Qantas are probably our two most recognised global brands and these have not been fantastic investments over the last decade. In the Brand Directory for 2012, we have some brands that have value, but they are not world beating brands, they are local franchises.
So are there any companies in Australia that would tempt Buffett? Yes, but not many.
Buffett generally doesn’t invest in cyclical businesses, so this rules out the mining companies.
He likes to invest in a few banks, so maybe some of our banks might make his portfolio. However at their current prices, I would be very surprised if he decided to buy Commonwealth bank trading at 2.4 times book value when he can buy Wells Fargo at 1.2 times book value or Bank of America at 0.5 times book value.
Buffett has been buying more of the US banks recently, but most of his purchases have been after significant pain the the mortgage market. Something we haven’t seen here in Australia (yet).
He likes to invest in insurance companies, so would QBE make the list? With QBE’s highly geared structure, I would think that Buffett would throw it into the too hard basket.
IAG might pop up on his radar, but they have had a less than stellar record over the last 10 years so it is also unlikely.
Buffett has always liked newspapers since his days as a delivery boy, but with Fairfax destroying capital at an alarming rate, it is probably not a worthy investment. Newscorp is one of the stocks that may be on his radar as the formidable Rupert continually surprises his competitors.
Buffett doesn’t invest in telco’s so everyones favourite – Telstra, is not going to make the cut.
So with the miners ruled out, the banks likely over priced, the telcos too uncertain and our insurance companies having been poorly run, what is left?
He might like a piece of ARB. The market leading 4 wheel drive company that has grown its shareholders funds well into the double digits for the last decade, however that is looking a bit overpriced at the moment.
Fleetwood is up Buffetts alley. He owns an amazing caravan business in the US. I would guess that Buffett would be worrying about a slowdown in mining affecting Fleetwood’s manufactured housing business.
Having invested in financial reporting at rating companies like Moody’s, Buffett may take a look at Iress which has a slightly different business, but still a moderately strong moat. Iress has also had a very good run of late and is not looking like it would fit in Buffett’s discounted cash flow mental models at present.
Buffett doesn’t mind an investment in oil and gas. His Conoco Phillips investment has been one of his worst performers, but he hasn’t sold all of it. A company like Origin energy might tickle his fancy with its current price falls, but with the US shale gas revolution and potential LNG exports out of the US, the upside on Australian high cost gas producers might be less than many predict.
Buffett has previously invested in Sanofi-Aventis, so would CSL get some research time? I would think it would. CSL appears to be kicking some goals at present, however with new management in place and a very high valuation, Buffett would probably leave it for another time.
Woolworths is a wonderful business that Buffett would also probably invest in, however his recent purchases in Walmart at 10 times earnings and Tesco at 8 times earnings make investing in Woolworths at 20 times earnings an unlikely prospect.
Buffett recently bought Burlington railway. So would QR be on his radar? It might, however with Burlington earning twice the return on equity and significantly lower debt that QR does, he would probably let that one slide.
So if Buffett was located in Australia, he would have a difficult time using his investment philosophy to fill a portfolio of Australian stocks.