Here are three take-home messages I’ve spotlighted from his latest letter to shareholders. 

Running winners

The real Warren Buffett once quipped that his ideal holding period was ‘forever‘. While Smith hasn’t gone this far, he has frequently made it very clear that part of Fundsmith’s strategy is not to trade very often and run its winning picks.

He made this point again last month:” Someone once said that no one ever got poor by taking profits. This may be true but I doubt they got very rich by this approach either.“

As an illustration of his commitment to not jumping in and out of stocks on a whim, Smith still holds seven companies that were originally bought when the fund kicked off in 2010. That might not seem like many. However, his fund is highly-concentrated, only holding between 20 and 30 shares at any one time.

A quick check reveals that I’m a lot worse at running profits than Smith. Positively, I am getting better, having held Somero Enterprises, IG Group and Greggs for a few years now. I’ve no intention of selling up either!

Buy quality

Buffett famously bought into very cheap stocks early in his career and made a killing. That said, his investment strategy would later change to buying only the highest-quality companies he could find. These had some kind of ‘moat’, or competitive advantage, over rivals. This may take the form of a very strong brand or enormous marketing budget or control over distribution. Think Coca-Cola. 

Smith adopts a similar approach, name-checking Buffett in January’s letter. In his view, “the biggest problem with any investment in low-quality businesses is that on the whole, the return characteristics of businesses persist.” 

This is why Fundsmith’s leader vehemently refuses to temporarily invest in stocks that may benefit the most from the post-pandemic recovery in economic activity. So no IAG or easyJet for Smith.

Having owned one, two or seven real stinkers in my time, I’m now a fully signed-up member of ‘Team Quality’. In addition to my stake in Fundsmith Equity, I’ve been topping up my holding of Smithson — the small/mid-cap-focused investment trust that also adopts Smith’s strategy.  

Don’t obsess over price

Having highlighted the importance of buying good businesses, Smith then turns his attention to the issue of valuation. In his view, “highly rated does not equate to expensive any more than lowly rated equates to cheap.“

For me, this has links to Buffett’s suggestion that it is better to buy a great company at a reasonable price than the other way around. 

Not obsessing over the price I’m required to pay for a stock has taken me years of practice. I’ve lost count of the number of times I’ve waited for the prices of great stocks to ‘correct’ only for this to never happen. More often than not, a top growth company’s valuation has remained fairly constant while its share price has soared. 

However, I do think that I’m steadily getting better at it. In fact, there’s one FTSE 100 stock that I’d be very happy to buy right now, despite still being very highly rated. 

The post I’m listening to ‘Britain’s Warren Buffett’ and buying these stocks appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity, Smithson Investment Trust, Greggs, IG Group and Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As a value investor, this performance has attracted my attention. I’m always looking for cheap shares that can diversify my portfolio, and it seems as if Tesco might qualify.

However, Tesco’s stock price doesn’t tell me much about its underlying performance. Just because it is trading lower today than 12 months ago, doesn’t mean the stock is worth buying. So I need to dig deeper.

Looking at Tesco’s financials

The first step I take in understanding if Tesco is undervalued is checking its financials.

Tesco recently released its preliminary results for 2020. Headline sales excluding fuel were up 7.1% to £53.4bn, driven by an 8.8% rise in its core UK and Ireland stores. However, Tesco Bank revenue fell by £400m, or 31.2%, during the pandemic. Adjusted operating profit also dropped to £1.8bn from £2.5bn in 2019-20, down 28.1%. This was largely due to £900m of extra costs relating to Covid-19. 

However, it was not all doom and gloom. Covid-19 has been dreadfully difficult for almost every industry, grocery included. Tesco has implemented massive infrastructural and behavioural changes to combat the pandemic. But the supermarket reckons only a quarter of these extra costs should continue into 2021-22. If this is the case, then Tesco has predicted that its bottom line could see a boost of £675m from lower expenses.

To me, 2020 was a Covid-induced blip.

Tesco’s share price potential

Despite the rise of discount competition, Tesco is still dominant in the UK grocery market with 27% market share. Although it operates in a mature market, meaning that growth will be slower, I’m not worried. Its market dominance and 9.15p per share dividend payment make it an optimal retirement stock for me.

And it does still have growth opportunities. Tesco is focusing on growth by opening new Express format stores. These are smaller shops that typically have less choice than their larger counterparts. I think this enables Tesco to boost its brand and distribution network at lower cost. As well, Tesco has entered the growing plant-based meat industry, a sector that analysts expect to be worth $17bn globally by 2024.

Continued innovation and market opportunities such as this will only help to see Tesco’s share price grow. 

Risks to Tesco’s share price

As a British grocery chain at the top, it can be very easy to fall. Stiff competition from the likes of Sainsbury’s and Morrisons pose a significant threat. The German players are also making strides in the British market, with Lidl and Aldi both gaining market share in 2020. 

And Covid-19 is still a problem. Tesco’s profits could suffer if more infectious variants of Covid-19 emerge, as we’ve seen in Brazil, and postpone the global reopening. Conversely, Tesco’s sales may take a short-term hit if pubs, bars, and restaurants boom after reopening.

So, is it too cheap?

I believe that Tesco represents a great discount buying opportunity right now. This is a dividend-paying market leader that has managed a global pandemic pretty well from my perspective. Any dip in its price is short-term in my opinion, so I’d be happy to buy it at these prices.

The post Is the Tesco share price too cheap at current levels? appeared first on The Twelfth Magpie.

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Jamie Adams has no position in Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.