3 Value Stocks Buffett Wishes He Could Buy

April 22, 2024 at 08:35 AM EDT

Warren Buffett

The retail investor has one undeniable advantage over Wall Street’s professionals. The big guys need to show quarterly returns; otherwise, no performance fees can be collected. This places a severe investment horizon limit on the type of businesses they can buy.

Another limitation comes through sizing. Value investors like Warren Buffett cannot buy companies that are below a certain market capitalization, as it would be an insignificant position failing to move the needle for the entire fund. Apart from their smaller market caps, three stocks would fit the value investment criterion today, yet the big funds cannot act upon them.

Names like Abercrombie & Fitch Co. (NYSE: ANF), Sociedad Quimica y Minera de Chile (NYSE: SQM), and even FMC Co. (NYSE: FMC) could give retail investors their own Buffett moment without the need for billions of dollars in buying power.

It’s Time For a Consumer Reset

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First quarter 2024 earnings from financial stocks like Bank of America Co. (NYSE: BAC) show an inflation-choked U.S. consumer concerning credit card delinquency rates and declining FICO scores. However, consumers are shaking these trends off.

With U.S. consumer sentiment reaching a 3-year high, it seems that expectations of lower interest rates ahead are causing a bullish psychological effect for the consumer sector. This is where the apparel industry comes into play.

With cotton futures falling by as much as 22% in the past month, investors may want to look into apparel’s potential new bull run. Not all stocks are created equal, though; here’s why Abercrombie & Fitch fits.

Compared to the retail sector’s P/E valuation of 23.6x, Abercrombie & Fitch stock offers investors a 25% discount through its current 17.7x P/E valuation.

More importantly, for those justifying a bargain stock, the company operates under industry-leading gross margin rates of over 60%, unseen by competitors like American Eagle Outfitters Inc. (NYSE: AEO), whose financials show a gross margin of only 38.7%.

These margins allow management to efficiently invest leftover capital, generating returns on invested capital (ROIC) rates of up to 15% annually, significantly above American Eagle’s 8.3%.

Analysts at Jefferies Financial Group boosted Abercrombie's valuation to $155 a share, calling for a 40% upside from today's stock price.

As consumer credit deteriorates, as proven by bank earnings, the Fed may look to lower interest rates sooner, helping boost the industry further after its recent breakout.

FMC’s Run to Restock the World

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According to its fourth-quarter 2023 earnings report, FMC’s competitor, CF Industries Holdings Inc. (NYSE: CF), states that the agriculture sector could be at a cyclical low.

With stock-to-use ratios coming off their bottom in 2022, the world may need to start farming more aggressively, as the end of the winter season affects global supply. This is where FMC’s fertilizers and specialty chemicals come into play.

The services PMI shows the agricultural sector pushing its third consecutive month of expansion, increasing the odds of rising quarterly earnings for stocks supporting this expansion (think FMC).

Trading at only 46% of its 52-week high, the stock starts to fit the potential bargain profile. Its 5.5x P/E valuation today is 65% below the chemical industry’s average 15.6x multiple. Wall Street analysts, particularly those at the UBS Group, see a higher valuation for the stock.

These analysts slapped an $84 share price target on FMC. The stock would need to rally by 45% to prove these predictions right. More than that, the stock is 92% owned by institutions, giving investors a quality stamp.

EVs Aren’t EVs Without Sociedad Quimica’s Lithium

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After striking an exclusive deal with BYD Co. (OTCMKTS: BYDDF), Sociedad Quimica y Minera is now the primary lithium provider for arguably the world’s leading electric vehicle (EV) manufacturer.

Because BYD serves Asia’s fastest-growing middle classes, EV demand in the region could send new orders through the roof, boosting lithium demand as batteries cannot be made without the commodity.

This is where Sociedad Quimica y Minera stock becomes a target, trading at only 55% of its 52-week high and having as much upside as ever.

Analysts expect the stock to grow its earnings per share (EPS) by as much as 34.7% in the next 12 months. Investors can get exposure to this growth at only 6.4x P/E, a 45% discount to the mining industry’s average 11.7x valuation.

With a consensus price target of $66 a share, this stock is set to advance by 46.7% from where it trades today, solidifying the market’s thesis behind the EV wave’s lithium demand.

Like cotton, lithium prices declined by 82% from their 2022 peak prices, which could signal a potential cyclical bottoming for lithium.

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3 Value Stocks Buffett Wishes He Could Buy

It’s Time For a Consumer Reset

FMC’s Run to Restock the World

EVs Aren’t EVs Without Sociedad Quimica’s Lithium

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