Warren Buffett is quoted as saying that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“. From this, I would hazard to guess that buying cheap, unloved UK shares trading at a discount with no regard to the historical performance or potential prospects of the company is something Warren Buffett would never do.
Now, a screen of companies won’t tell me much about their prospects. But it’s a good place to start. At the very least, it might help narrow down my options. For a Warren Buffett-style screen, based on my interpretation of his investment style, I want to look for cheap companies, but I also want them to be good ones.
A Warren Buffett inspired screen
This is the screen I used:
- Market cap > £50m
- Profit margin (five-year average) > 20%
- Earnings per share growth rate (five-year average) > 5%
- Price-to-earnings ratio 5 – 15
- Price-to-book ratio 0-5
- Interest coverage ratio > 2
I ranked the UK shares the screen produced by EPS growth rate, and the top five were as follows:
- Burford Capital
- HgCapital Trust
- CMC Markets
- B.P Marsh & Partners
- IG Group Holdings
All five of these companies are in the financial sector. Now, Warren Buffett cut his holdings in various US banks in the third quarter of last year. That seems at odds with what this Buffett-inspired screen has thrown up. I don’t know what has happened since the most current peek into his Berkshire Hathaway is dated 30 September 2020. And US banks which earn most of their income from investment banking and trading made a killing in the fourth quarter of 2020. Some parts of the financial sector appear to be in good health.
Five UK shares for further study
Two of the five companies, CMC Markets and IG Group, are providers of online and mobile trading platforms. Both have benefited from a flood of new customers during the COVID-19 pandemic. Both are eager to use the bumper revenues gained in 2020 to expand into new markets and broaden their offerings and reach in existing ones.
Hgcapital is an investment trust that specialises in software and service companies. Its share price has outperformed its benchmark — the FTSE All-Share —  comfortably over the last five years. Its manager has almost 30 years of experience and believes the portfolio is well-positioned to continue to deliver, given the economy’s ongoing digitalisation.
B.P. Marsh invests in early-stage public and private financial service companies across the globe. It is a venture capital provider to firms in niche areas, particularly in the insurance and reinsurance fields. The company has stated that it remains well-positioned to carry out new investments and there are plenty of opportunities in the pipeline.Â
Finally, there is Burford Capital. This company makes loans to companies and law firms, secured against the value of their legal claims, settlements, and the like. The company has legal claims worth over £700m sitting on its balance sheet which could be transformative, but, only if they are realised.
I am confident that Warren Buffett would not invest in something just because it passed through a screen. But, digging deeper on five companies turned up by a Buffett-inspired screen is a lot easier than wrestling with thousands of them.