Brian Feroldi: 3 Steps to find undervalued stocks like Warren Buffett

How does Warren Buffett find undervalued stocks?

By following this SIMPLE process.

Here's a step-by-step guide every investor can copy:

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Buffett laid out his criteria in his 1978 shareholder letter:

1. A business that we UNDERSTAND

2. With favorable LONG TERM PROSPECTS

3. Operated by COMPETENT people

4. Available at an ATTRACTIVE PRICE

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STEP 1: Use a stock screener like @finchat_io https://finchat.io/

This will greatly narrow down the potential list of companies. Input the below filters into the stock screener:

Filter 1: Market Cap > $1 billion

Why? These companies are more likely to be mature and have the financial history needed to make an informed decision.

Filter 2: Price to Earnings Ratio < 15

Why? PE of 15 = $1 of earnings for every $15 you invest That's a 6.7% return (on earnings).

The cheaper you can buy earnings, the more value you're obtaining.

Filter 3: Return on Equity > 15%

Why? “Management's objective is to achieve a ROE higher than that of the American industry generally."

The higher the return on equity the better.

Filter 4: Long-Term Debt to Equity < 1

Why? Buffett prefers companies with “little or no debt”.

Filter 5: 5 Year EPS growth > 0%

Buffett wants a proven history of profit growth.

Higher = better

STEP 2: Check the Company’s Financial History, You want to make sure the company has solid past performance.

This gives us confidence in their long-term prospects & management competence.

Check their financials over the past 10 years. Ask:

• Did REVENUE grow?

• Did EPS grow?

• Did RETURN ON EQUITY stay high?

• Did DEBT stay stable or shrink?

Eliminate the nos.

STEP 3: Research the business

Read the annual report and ask:

1. What's their business model?

2. What problem are they solving?

3. Who is making the decisions?

4. What is their competitive advantage?

If you don’t easily understand this easily, eliminate it!

Now you have a high-quality list of companies that fit Warren Buffett’s rules:

1. A business that we UNDERSTAND

2. With favorable LONG TERM PROSPECTS

3. Operated by COMPETENT people

4. Available at an attractive price - UNDERVALUED

5. Research and track them further!

Or, just steal ideas from Buffett's $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ portfolio directly:

Berkshire Is Positioned Well For 2024 And Buffett May Eye An Acquisition | Seeking Alpha

$Apple(AAPL)$ $Bank of America(BAC)$ $American Express(AXP)$ $Coca-Cola(KO)$ $Chevron(CVX)$ $Occidental(OXY)$ $The Kraft Heinz Company(KHC)$ $Moody's(MCO)$ $DaVita HealthCare Partners(DVA)$ $Citigroup(C)$