FTSE correction: a once-in-a-decade chance to outdo Warren Buffett?

Legendary US investor Warren Buffett only holds one British stock in the Berkshire Hathaway portfolio – it Diageo. That’s probably not the best advertisement for it FTSE 100. However, I think Buffett may be missing out on some opportunities by avoiding UK-listed stocks.

Maybe this is my chance to beat a billionaire investor.

Buffett’s strategy

The so-called Oracle of Omaha uses a value investing strategy. These strategies have consistently outperformed the index over the past century. Value investing involves picking stocks that are trading below their intrinsic value, or book.

As such, Buffett focuses on buying undervalued stocks. It’s not the same as a company that looks cheap because the price is lower than it was a year ago.

Finding undervalued stocks requires research. Investors use value investing strategy models and compare short-term metrics to create a better understanding of a company’s value.

Value investing in the FTSE

Buffett once said: “A simple rule dictates my purchases: fear that others are greedy, and be greedy when others are afraid..”

Well, look at it FTSE 350, which obviously scared many investors. The index is up 1% in one year and just 5% in five years.

It is important to highlight that some parts of the index rose – namely resources and energy – while other parts of the market suffered. Shares in housing, banking, retail and travel are among the best-performing sectors.

While macroeconomic forecasts in the UK play a role in this, some UK stocks have been unpopular for some time. Investment has generally slowed since the Brexit vote as our exit from the EU is expected to reduce the country’s growth prospects.

However, in a gloomy market, I insist that we have a great opportunity to find undervalued stocks.

Quality choice

Buffett has often said that he would rather pay a fair price for a good company than a good price for a fair company.

But now, on the FTSE, I think many blue-chip stocks are trading at a discount. Those two Lloyds and Barclays. The discounted cash flow model shows that the value is less than 60% and 70%.

Naturally, banks reflect the health of the economy, and a recession – as predicted in the UK – means worse debt and disability costs. However, the situation is somewhat different now, with interest rates at levels not seen in more than a decade. These tariffs cause profits to rise.

There are other quality companies in the FTSE 100 trading at attractive discounts today, including Legal & General and GSK.

These companies will get a boost with a general improvement in the UK macro economic outlook. I hope this will happen.

More bargaining

I also look at stocks in the UK’s burgeoning renewable energy industry. One of them is Greencoat UK Wind which trades at a 5.1% discount versus net asset value and has a price-to-earnings ratio of around 7.5. It also offers a dividend yield of 4.8%.

In the near term, its development may be held back by electricity levies, but in the long term, I expect it to grow.

I recently bought shares in all these companies. But with the discount in mind, I’m looking to buy more.