A massive buying opportunity’s emerged for British investors, according to one of billionaire investor Warren Buffett’s valuation tools. It’s a metric he’s used to predict market downturns and rebounds for decades. And right now, it shows a once-in-a-decade chance to snap up UK shares and aim to build enormous long-term wealth.
The Buffett indicator
Buffett uses a lot of tools and tactics to evaluate companies and find amazing investment opportunities. And despite some being created decades ago, he still actively uses them today. One of the lesser-known metrics is the Buffett indicator. And right now, it’s screaming that the UK stock market’s filled with bargains.
This metric compares the total market capitalisation of all the companies on a country’s stock exchange with the nominal gross domestic product (GDP) of that country. The smaller the percentage, the more shares are being undervalued.
Here in the UK, that would be the London Stock Exchange. And at the end of June, the total market capitalisation of all companies on the exchange came in at £3,035bn. By comparison, the latest figure for GDP stands at £2,687bn.
That puts the Buffett indicator at 113%. Alone, it doesn’t mean much. But compared to 10 years ago, where it stood at 220% before steadily trending down, it suggests that UK shares are being significantly underappreciated today, especially since they dropped from 119% last year and 125% the year before that.
Where to invest?
Buffett’s indicator isn’t perfect. There have been numerous occasions where it didn’t accurately foresee stock market tumbles. As such, it shouldn’t be viewed as gospel. However, when combining this indicator with other pieces of financial data, the theory that UK stocks are largely being undervalued seems to hold up, in my opinion.
Obviously, there are exceptions, with investor hype and excitement driving up valuations to seemingly unsustainable heights. But at the same time, there sees to be far more companies going unappreciated. Looking at my own watchlist, I see that B&M European Value Retail (LSE:BME) isn’t getting a lot of love right now.
On a price-to-earnings basis, B&M’s priced at just 12.5 times. That’s behind Tesco’s 13.5, despite the fact that B&M has massively superior profit margins and growth potential. For reference, Tesco’s operating margins stand at a measly 4.1% compared to B&M’s 11.1%, which is the highest in the retail industry.
In the weeks leading up to its first-quarter results, investors had been selling off shares as fears mounted that a slowdown was coming. These fears weren’t entirely unjustified, given the firm was facing some fairly tough comparables. And on the day of the results, a slowdown did indeed emerge.
However, revenue still continued to climb in the right direction, with most of the growth emerging from its European expansion into France. Given Europe presents the biggest long-term growth opportunity for this enterprise, it seems investors are too focused on short-term comparables rather than focusing on long-term trends. And that’s why I think B&M could be one of many buying opportunities awaiting to be capitalised on.
This post was originally published on Motley Fool
