Earlier this year investing legend Warren Buffett set out the reasons why he’d been buying stocks in Europe. Asked whether he felt that financial uncertainty across the Continent was a cause for concern, he replied that the weak sentiment was actually one of the main reasons to get out his chequebook. For the same reasons he bought US shares during the financial crisis, he said: “It wasn't because the news was good, it was because the prices were good.”*
For the billionaire investor, heavily influenced by the quantitative value rules of his mentor Benjamin Graham, the appeal of beaten down markets is that they become littered with value opportunities. During 2013 equity markets on both sides of the Channel have perform well, with the FTSE 100 and FTSE Eurofirst 300 both rising in value by around 14.5%. But for value hunters, that doesn’t necessarily mean that credible, well-priced shares can’t still be found in Europe… far from it.
Large cap quality and value
While Buffett’s value investing principles have made him a mint, it’s worth remembering that he also puts huge emphasis on robust competitive advantages, outstanding management leadership and proven track records of growth. These features are the reason why Buffett’s Berkshire Hathaway has been a decades long investor in mega cap shares like Gillette, Coca Cola and American Express. His blend of quality and value - which also richly rewarded another Ben Graham disciple, Joel Greenblatt - is proven to be a hugely effective strategic approach in investing. A study last year by US fund manager AQR Capital Management (entitled Buffett's Alpha) showed that almost all of Buffett's outperformance over the years could be explained by the 'general tendency of high quality, safe, cheap stocks to outperform'. At a time when there are signs that some stock prices have become overextended, it’s arguably even more important that investors focus on those factors.
With equities proving to be such a magnet for investors over the past year, helped by ongoing economic stimulus and low interest rates, the share share prices of many great quality companies have done well but their attraction as value plays has sadly declined. Stockopedia’s new Quality + Value Rank simplifies the process of finding high ranking companies by using a blend of metrics for each factor and then combining them into a composite score. You can read all about that here. Unsurprisingly, stocks…
