Investing in good quality companies that are trading at less than its intrinsic value can make you a mint when the share price corrects to reflect that company’s assets.
Warren Buffett identifies companies that he thinks are undergoing a temporary blip, but are fundamentally sound, and when they experience a price correction he sells them on and takes a healthy profit.
Morningstar equity star ratings can help you emulate Buffett’s success. Morningstar equity analysts can help you use their research to determine a share’s Fair Value, and from this they award it a star rating. A stock with a five star rating is trading at significantly less than its Fair Value – and one that has been awarded one star is considered by analysts to have a share price much greater than the Fair Value estimate.
Buying single company stocks is a more risky approach to investing than buying composite funds. Both active and passive funds are naturally diversified and with one investment you buy exposure to a wide variety of underlying companies. However if you already have a well-diversified portfolio, stock investing can be cheaper and potentially deliver greater returns. Because equity investing is more risky, it is advisable that private investors stick to those listed in developed markets, which are less risky than emerging market equities.
Using Morningstar Select we screened for equities listed in Europe, the US and the UK that are trading at less than their intrinsic value which have been awarded a four or five star rating my Morningstar analysts. We highlight five below.
Barclays (BARC)
Barclays is one of the largest banks in the United Kingdom and has operations around the world. Its businesses include U.K. banking, which serves retail and business customers in the United Kingdom; Barclays Capital, a debt-focused investment bank; international banking, which serves retail and business customers in Europe, Africa, and Asia; and Barclaycard, a large credit card issuer.
Coca-Cola (KO)
Coca-Cola is the world's largest nonalcoholic beverage company. The firm, which sells a variety of sparkling and still beverages, generates nearly 60% of its revenue and about 80% of its operating profit from outside the United States. Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid. After the asset swap with Coca-Cola Enterprises, Coke now owns about 80% of its distribution in North America.
E.On (EOAN)
E.On is one of the world's largest integrated power and gas companies. It supplies 35 million customers with gas and electricity and owns 61 gigawatts of conventional and renewable power generation capacity, primarily in Europe. Its oil and gas exploration and production unit operates in the North Sea, Russia, and North Africa.
General Motors (GM)
General Motors Company emerged from the bankruptcy of General Motors Corporation in July 2009. GM has 11 brands and operates under five segments: GM North America, GM Europe, GM South America, GM international operations, and GM Financial. The United States now has four brands instead of eight. The company remains the market leader in the U.S. with about 18% share in 2013. GM Financial became the company's captive finance arm in October 2010 via the purchase of AmeriCredit.
Procter & Gamble (PG)
Since its founding in 1837, Procter & Gamble has become the world's largest consumer product manufacturer. It operates with a lineup of leading brands, including 23 that generate more than $1 billion in annual global sales such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo, and Cover Girl cosmetics. P&G sold its last remaining food brand, Pringles, to Kellogg in 2012. Sales outside the U.S. represent more than 60% of the firm's consolidated total, including nearly 40% of which derive from emerging markets.
