The renowned Omaha-based value investor Warren Buffett aims to buy cheap, hold long, and outperform, a simple strategy, yet notoriously difficult to implement. It requires a great deal of discipline and patience to wait for opportunities where good quality companies are being neglected by the market, and the current share price no longer reflects the true value of the business.
I often like to screen the market for ideas that I think history’s greatest investors might be interested in, and my latest FTSE 350 filter highlighted Dr. Martens (LSE: DOCS) as one such company.
I think it’s fair to say that value investing, in the style popularised by Warren Buffett, is not the most exciting form of investing. It often involves identifying a high-quality company and then resisting the urge to purchase until the price becomes out of sync with the strong fundamentals. For that reason, I like to automate this process by using market screeners, which will notify me when a company with the characteristics I desire enters a suitable price range.
For these market screeners, I look for companies that have consistently grown earnings, a steady increase in profit margins, relatively low levels of borrowing, and plenty of positive cash flow. I find these core characteristics act as a good filter for identifying the type of shares I would be interested in, and in this instance, Dr. Martens met the restrictions.
This is a company that has seen double and triple-digit operating cash flow increases over the last one and two years respectively. It has also managed to steadily increase profit margins, and boost the efficiency with which it generates income from invested capital. In addition, Dr. Martens has a relatively low level of borrowing, in comparison to the industry and relative to its market capitalisation.
Despite these positive underlying fundamentals, Dr. Martens has experienced a tough time in the market over the last two years since its IPO, falling 39.1% in 2022. The company is also down just over 40% since the IPO in early 2021, indicating the market has not been hugely favourable towards Dr. Martens since joining the index. There are times when the market appears to be misjudging a company, but also times when falls in valuations are justified, so it’s important to consider whether this reduction in valuation is warranted.
For my portfolio, I would be tempted to add Dr. Martens shares, as I believe it has proven strong underlying fundamentals that Buffett would be looking for in an investment. Recent share price falls have now brought the company into a price range that is more in line with value investment principles, too. I would therefore be tempted to follow the investment strategy of Warren Buffett and add Dr. Martens to my portfolio.
The post The shoe is on the other foot: why I think Warren Buffett might like Dr. Martens appeared first on The Motley Fool UK.
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Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.