Four Warren Buffett Stocks Trading Under $3
Let’s face it. We all want to invest like Warren Buffett. Buffett is a great investor who now benefits from his unique position in the investment community. When Goldman Sachs needed money during the financial market meltdown of 2008, they called Buffett offering a 10% dividend on his $5 billion investment.
Goldman created a special class for Buffett to invest in and gave him the option to buy shares of common stock at a discount in the future. That’s one of the ways Buffett is unique – he is able to complete deals no individual investor will ever be able to participate in.
We Can Do More Than Buffett Can
But we have an advantage over Buffett in some ways.
Let’s say Buffett found a great insurance company with a market cap of $400 million. That’s less than 0.01% of the value of his investment portfolio. If the insurer does great and doubles in value Buffett would increase the value of Berkshire Hathaway by less than 0.01%.
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More realistically, let’s say he gets a 20% return on his investment. That increases his portfolio value by $80 million or less than 0.002%.
Buffett made $500 million a year in dividends on his Goldman investment and earned an estimated 50% on his investment over 5 years by exercising the option he had. This is the kind of return he needs to continue growing Berkshire and given that requirement, he simply can’t look at small caps.
This is where we, as individual investors, have an advantage over Buffett. We can buy small cap stocks because 20% gains mean a great deal to us. One way to exploit this advantage is to study Buffett’s deals and apply his valuation principles to small caps.
Finding Stocks Buffett Can’t Buy
We could quantify the kind of stock we believe Buffett likes. In the letter to shareholders he writes every year, Buffett has mentioned that he measures management with an accounting tool called return on equity (ROE).
This is the ratio of net income to shareholders’ equity. ROE measures the percent of profit management is earning with the money shareholders invested in the company. ROE can vary by industry so a detailed analysis is usually needed to understand how well management is performing relative to its peers.
For our purposes, we are looking for the best small caps so we will require companies to have an ROE of at least 15%. This level is better than the ROE reported by about 70% of all publicly traded companies. This limits our search to the best management teams in the country.
We could also require the company to have a higher than average return on assets and a reasonable price to cash flow ratio. By requiring a reasonable ration, we are eliminating stocks with very low valuations that could be headed towards bankruptcy.
One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions Or, you could just screen on new highs. An example is shown below.
For this screen, we selected stocks that Buffett might like and that are too small for him to realistically take a significant stake in.
This screen is a reasonable starting point for additional research. There is no guarantee any of these stocks will deliver gains and risk should always be considered. It’s also important to remember that screens like this will not identify unique risk factors.
Stocks passing the screen are shown below.
Tengasco (NYSE: TGC) is thinly traded but prone to make large moves.
A stock like this could be bought and sold by aggressive traders looking for small gains. For example, a buy could be made and immediately after that order is filled, a profit taking sell order could be entered. If the stock spikes higher, as it has in the past, a strategy like that could deliver gains.
180 Degree Capital (Nasdaq: TURN) is in a down trend.
TURN operates as a business development company. The company’s investment objective is to achieve long-term capital appreciation by making venture capital investments.
The company specializes in making investments in companies commercializing and integrating products enabled by disruptive technologies mainly in the life sciences industry and provides operational and management resources, and financial solutions to such companies.
Its investment portfolio includes publicly traded and privately held companies. The Company has focused its investments on transformative companies in precision health and medicine.
If an investor is interested in a company like this, they would need to obtain TURN’s portfolio listing and evaluate the companies on that roster. TURN’s future returns could be heavily dependent on its investments and that will require research to evaluate.
TheStreet.com (Nasdaq: TST) is the well known financial information site.
This stock has been trading since the internet bubble and never recovered to its initial public offering high.
But revenue is steady and cash from operations is positive. This could be a brand that a larger media company would like to acquire given its dedicated reader base and proven ability to attract internet traffic.
The fourth company on our list is AEterna Zentaris Inc. (Nasdaq: AEZS).
This is a volatile biotech company with two principal product candidates — Zoptrex (zoptarelin doxorubicin) and Macrilen (macimorelin) in oncology and endocrinology.
Both products are in Phase III clinical development. AES also has a luteinizing hormone-releasing hormone (LHRH)-disorazol Z conjugate (AEZS-138), which is in pre-clinical development in oncology and is available for partnering. The company did report a large jump in revenue in the past twelve months.
These stocks could all deliver significant gains or could all prove to be worthless. That is the risk of any investment but the potential gains in small cap stocks can be large while the potential risks are limited to the price paid at the time of purchase.
Each of these stocks, in particular, could be worth additional research since they display at least one quality Buffett could look for.