I’m listening to Warren Buffett and buying these dirt-cheap stocks!

Warren Buffett is one of the most famous investors in the world. He amassed a net worth of more than $100bn by November 2022 – as a result, he is the sixth richest person in the world.

Of course, we all want to emulate what the so-called ‘Oracle of Omaha’ has achieved. Buffett uses value investing strategies and value investing strategies have consistently outperformed the index over the past century.

So, how can you invest more like Buffett, and what does it mean to pick stocks?

Value Investing

Value investing involves picking stocks that are trading below their intrinsic or book value. This gives us a margin of safety. Buffett is known to look for a margin of safety of around 30%, or even more.

Calculating this margin of safety requires investors to perform fundamental analysis. This analysis revolves around metrics such as the discounted cash flow (DCF) model and short-term valuations such as EV-to-EBITDA.

This approach to value investing often requires a contrarian mindset, which means not following the crowd, and having a long-term investment horizon.

FTSE share price

At FTSE 100 may be pushing up, but many stocks trade at a discount in the UK. That’s because the index has been pulled up by surging resource stocks. At FTSE 250 further reflecting the challenges facing UK companies – down 8% over the year.

So in the midst of this bear market, I think now is a good time to look for undervalued UK stocks that meet Buffett’s criteria.

But he also said that we focus on quality as well as discounts, he said that he prefers to pay the same price for a large company than a large price for the same company.

Top choice

Barclays it’s the unloved UK bank. Many UK financial institutions have long been unpopular with investors. And this is why I see it as an interesting area of ​​the market. A DCF model with a 10-year exit shows that Barclays could be undervalued by 68%.

Analysts expect Barclays can also benefit to the tune of £5bn in the coming two years from rising interest rates.

Currently, it is the cheapest UK financial institution, trading at a price-to-earnings ratio of 4.8. It will reflect some of the challenges of the last 12 months – fines and disability fees – but it’s a good starting point for my investment.

Another option is a medical equipment specialist Smith & Nephew. This stock has suffered since the start of the pandemic as national resources have been diverted to Covid and away from hip replacements.

A DCF model with a 10-year exit shows that the company can be undervalued by up to 40%. 2023 should be a better year for the company, as Covid becomes less of a problem in the health sector and the backlog of elective surgeries is resolved. However, inflation will remain a challenge, putting pressure on margins.

In the long term, I am particularly bullish. We have an aging population and this will increase the demand for elective surgery in the coming decades.

I recently added up on both of these stocks.