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Famed Omaha-based value investor Warren Buffett’s aim to buy cheap, hold long and do better is a simple strategy but difficult to implement. It takes a lot of discipline and patience to protect the opportunities of good quality companies that are being ignored by the market, and the current stock price does not reflect the true value of the business.
I often like to scour the market for ideas that I think history’s greatest investors might be interested in, and my recent FTSE 350 filter stands out. Dr. Martens (LSE: DOCS) as one company.
I think it’s fair to say that value investing in the style favored by Warren Buffett is not a very exciting investment method. It usually involves identifying a high-quality company and then resisting the urge to buy until the price matches strong fundamentals. To that end, I want to automate this process using market filters that notify me when a company with the characteristics I desire enters a suitable price range.
For these market filters, I look for companies that have consistently grown revenue, consistently increasing profit margins, relatively low debt ratios, and plenty of positive cash flow. I find these key features to be a good filter for identifying the type of stock I’m looking for, and in this case, Dr. Martens meets the criteria.
This company has seen double and triple digit operating cash flow growth in the last one to two years. It has also been able to continuously increase profit margins and increase the efficiency with which it generates income from investment capital. Additionally, Dr. Martens has a relatively low credit rating compared to the industry and relative to market capitalization.
Despite these positive fundamentals, Dr. Martens has had a rough time in the market in the two years since its IPO, falling 39.1% in 2022. The company is down more than 40% since its IPO in early 2021. After joining the index, the market was not very favorable for Dr. Martens. There are times when the market may misjudge a company, but there are also times when a fall in valuations is justified, so it’s important to consider whether this price cut is warranted.
For my portfolio, I’m tempted to add shares of Dr. Martens because it has proven the strong fundamentals that Buffett looks for in an investment. The recent drop in share price has now brought the company into a price range consistent with value investing principles. So I’m tempted to follow Warren Buffett’s investment strategy and add Dr. Martens to my portfolio.