Many of us look to Warren Buffett’s letters to shareholders for guidance. The multi-billionaire issues annual letters that provide investors with insights into his views and positions in the market.
One thing Buffett teaches us is that it’s never too late to start investing. After all, it’s worth remembering that the Berkshire Hathaway boss created 99% of his wealth after the age of 50.
Finding value
Buffett’s traditionally known for his value investing strategy. This means he searches for companies that are undervalued — stocks trading at a discount to their intrinsic or book value. But as time’s gone on, he’s increasingly moved to favour blue-chip stocks, or those he deems as being quality companies — in addition to being undervalued.
Historically, he’s known to look for a margin of safety of up to 50%. That means his own interpretation of the stock’s value is 50% greater than the company’s market value. In the current market, it’s certainly not easy to find companies with such a margin of safety.
As such, if I want to invest like Buffett, I need to be able to develop an understanding of how much stocks should be worth. The really easy way would be to use other people’s estimates.
City and Wall Street analysts have their own price targets, and if the consensus price target is considerably above the current share price, it could represent a good investment opportunity.
But it’s always good to do our own research. I could use City price targets as a guide and follow up with my own fundamental analysis, looking at price-to-earnings ratios, price-to-earnings-to-growth ratios and, of course, making comparisons within sector groups.
Investing wisely
To start with, if I have no savings, I can look to put a proportion of my monthly salary into an investment account. And from there I can look to invest in stocks and shares as and when the opportunity presents itself.
One company that could meet Buffett’s focus on value and quality is Royal Caribbean Cruises (NYSE:RCL). In fact, I’d be investing if my brokerage offered access.
Royal Caribbean is one of the three big cruising outfits globally. The company’s made an impressive comeback since the pandemic and is on course to register a record year in terms of revenues and profitability in 2024.
While higher interest rates may represent a threat to consumer spending, to date, demand for experience-based holidays like cruising has been very robust.
Likewise, Royal Caribbean has also reported considerable interest in its latest mega vessel, the Icon of the Seas. The world’s largest cruise liner entered service in January.
I have to remember the devastation for cruise specialists during the pandemic and they can be negatively affected by lesser events too. But from a valuation perspective, it looks like a strong pick. It’s trading at 13.4 times forward earnings, and this is expected to fall to 11.6 times in 2025.
Earnings are expected to grow strongly throughout the medium term, with the forward price-to-earnings hitting 10 times in 2026 and 8.1 times in 2027.
And finally, the all-important forward price-to-earnings-to-growth ratio sits around 0.79. To me, that infers the company is significantly undervalued.
