With share prices near record highs, I’m looking to Warren Buffett for ideas
Warren Buffettâs approach to investing involves focusing on quality companies that are out of favour. With stocks close to record highs, Iâm looking to do something similar.
Just over a decade ago, his investment vehicle, Berkshire Hathaway, bought a big stake in farm equipment firm John Deere in an agricultural downturn. And my latest idea is along these lines.
Buffettâs investment
Between 2012 and 2016, Berkshire bought just over 7% of Deereâs outstanding shares. This was at a time when weak crop prices were weighing on the industry.
In many ways, this was a classic Buffett investment â shares in a quality business trading at a discount because of temporary issues. But things didnât go entirely to plan. Crop prices took a long time to recover, staying in a prolonged downcycle until around 2020. And this was long enough for Berkshire to give up on its investment.
This shows that investments are never guaranteed to work, even for the best in the business. But Iâm looking at a similar idea for my portfolio at the moment.
Secular growth
The stock Iâm looking at is CNH Industrial (NYSE:CNH). Like Deere in 2012, itâs a farm equipment manufacturer thatâs trading at a discount as crop prices have fallen.
This idea didnât work well a decade ago. But I think the rise of automation in agriculture means an investment now isnât just about waiting for a cyclical rebound.
With no traffic around, itâs much easier to make a self-driving tractor than a self-driving car. And CNH is looking for this part of the business to account for 10% of sales by 2030.
Source: CNH Q2 Results Presentation
That’s double the current level and the company expects this to mean margins in its agriculture business increase from around 8% to 16%. Other things being equal, that means profits should double.
Out-of-favour valuation
The stock’s trading at a forward price-to-earnings (P/E) ratio of around 14. Thatâs well below the S&P 500 average and based on earnings that are down due to lower crop prices.
The company has a lot of debt on its balance sheet and this creates risk, especially if interest rates donât fall as expected. But this isnât necessarily as straightforward as it seems.
Around 80% of the firmâs debt is matched by financing receivables. In other words, itâs cash that the firm borrows and lends to customers to help them finance their purchases.
If CNHâs customers keep up with their debt obligations, I donât expect its debts to be an issue. And if they donât, it can repossess the equipment used as collateral to offset the losses.
Finding stocks to buy
In a 2022 interview, Todd Combs â a Berkshire investor â set out three things Buffett looks for in a stock to buy. And I think CNH might meet all of them.
The first is a forward P/E ratio below 15. The second is a 90% chance of higher earnings in five years, and the third is a 50% chance of growing profits at 7% a year.
The rise of automation in the farming industry should generate durable growth. And with agricultural commodities at unusually low levels, Iâm looking to take advantage.
The post With share prices near record highs, I’m looking to Warren Buffett for ideas appeared first on The Motley Fool UK.
Should you invest £1,000 in CNH Industrial right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if CNH Industrial made the list?
More reading
- After the Fresnillo share price crash, is this FTSE 100 stock now too cheap to ignore?
- 2 world-class stocks to consider buying for an ISA todayÂ
- These 3 household-name UK stocks have plunged 30% in a year! Time to consider buying?
- Diageo share price has been shaken â but could value now be hiding in plain sight?
- With a yield of 7.3%, is it time to consider ITV shares?
Stephen Wright has positions in Berkshire Hathaway. 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.
