I’m investing like Warren Buffett after the FTSE correction!

Despite the recent public meeting, many FTSE stocks that trade at a discount over 12 months. This is illustrated by FTSE 250 which is down 12% over the year.

While this correction has not been positive for most investors, it has created opportunities, especially for me as a value investor.

Discount environment

The UK index has been lifted higher by a rise in resource stocks – oil and energy giants shell it is a huge increase of 29% over the year. But the majority of UK stocks are still trading at a discount over 12 months.

For example, stocks in the housing sector are down about 35% over 12 months, on average. Giant house persimmon has 43% wiped off its share price. Other sectors, including banking, retail and travel also suffered.

Some stocks are cheaper for a reason. But in this deeply discounted environment, I have a better chance of finding undervalued stocks.

Value Investing

Value investing is a philosophy that involves buying stocks at a discount rather than their intrinsic value. This discount is often referred to as the margin of safety.

So this bear market environment should create favorable conditions for value investing.

Warren Buffett is one of the world’s most famous value investors. The so-called ‘Oracle of Omaha’ focuses on buying undervalued stocks, not just companies that look cheap because they are worth less than a year ago.

Value investing requires me to do my research. I can look at simple metrics like price-to-earnings, price-to-sales, or EV-to-EBITDA ratios, and compare them to my peers. Or I can run a discounted cash flow (DCF) model.

Apply Buffett’s teachings

Buffett tells us not to follow the crowd and fear that others are greedy. So I definitely have to look at the bear sector.

One firm I buy more of is a joint replacement specialist Smith & Nephew. The stock has yet to recover from the pandemic as elective surgeries take a back seat as healthcare resources focus on Covid-19.

Stocks are still not popular. But the DCF model with a 10-year exit shows that the company could be undervalued by 40%. I also predict a better 2023 for the company, as Covid becomes less of a problem and the elective surgery backlog is resolved.

The legendary US investor also told us to stick with what we know best. This is one of the reasons I don’t focus on pharmaceutical stocks. This is because I don’t know the size of the market for a particular drug, and interpreting trial data can be difficult.

In some respects, banking stocks can be easier to value. In the past month I have increased my holdings Lloyds. Banks today have two main forces at work.

Recessions usually mean bad loans and other disruptive costs for banks. And the current environment is clearly not good. But higher interest rates provide a huge tailwind and this will continue to increase profits for several years.

I see Lloyds as the net beneficiary of the current environment and the DCF model suggests it is undervalued by 40%.