I’d follow Warren Buffett’s advice to find Black Friday bargains in the stock market

Warren Buffett believes in buying stocks that are easy to understand. Stephen Wright thinks this is a good idea in the stock market’s Black Friday sales.

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Warren Buffett at a Berkshire Hathaway AGM

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Warren Buffett loves a bargain. As the Berkshire Hathaway CEO once put it: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it’s marked down.”

I’m not in the market for socks right now (saving that for Christmas). But I’m always interested in quality shares that are selling cheaply and Black Friday seems like a good time to be looking.

Finding stocks to buy

From an investment perspective, working out when a company’s shares are cheap is straightforward but not always easy. It involves comparing the price of the stock today with the cash the business will make in future.

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The trouble is, a company’s future earnings aren’t guaranteed. Investors can make estimates, but there is always a degree of uncertainty with this part of the equation. 

Fortunately, Buffett has two principles to help with this. The first involves sticking to businesses the Oracle of Omaha can understand well – those that are within what he calls his ‘circle of competence’.

Even so, there’s still scope for things to go wrong. So Buffett insists on a margin of safety and only invests when a good investment return doesn’t depend on everything going to plan.

Competence

So what does this look like in practice? Take AstraZeneca as an example – the stock is down 8% since the start of the year and the company’s share price reached a 52-week low recently. 

Created with Highcharts 11.4.3AstraZeneca Plc PriceZoom1M3M6MYTD1Y5Y10YALL24 Nov 201824 Nov 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

This doesn’t automatically mean the stock is a bargain, though. That comes down to how much cash the company is going to make in future and this isn’t necessarily easy to judge. 

As a pharmaceuticals company, AstraZeneca’s profits depend on its ability to develop and market drugs successfully. The average cost of bringing a drug to market is around £1bn and the success rate is roughly 9%.

Without specialist technical knowledge, it’s hard to assess the company’s drug pipeline accurately. As a result, it’s very difficult for someone like me to identify AstraZeneca as a stock to buy.

Good deals?

I do think there are some good opportunities at the moment, though. Two that stand out to me are Diageo and Unilever – consumer goods companies whose future prospects don’t rely on complicated technical innovation.

Shares in Diageo are down 22% this year as growth in Latin America has stalled. But at a price-to-earnings (P/E) ratio of 17 and anticipated growth prospects of between 5% and 7%, I think the stock looks like good value.

Created with Highcharts 11.4.3Diageo Plc PriceZoom1M3M6MYTD1Y5Y10YALL24 Nov 201824 Nov 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

The Unilever share price has fallen by around 9% since the start of January as continued inflation has started to weigh on the company’s sales volumes. But a dividend yield of close to 4% looks like a good opportunity to me.

Created with Highcharts 11.4.3Unilever PriceZoom1M3M6MYTD1Y5Y10YALL24 Nov 201824 Nov 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

Both companies rely on their strong brands for a competitive advantage. And their size helps them maintain this edge by allowing them to spend more on marketing than their rivals.

Risks and rewards

Going forward, the main risk I see for Diageo and Unilever is the continued threat of inflation. Higher prices can cut into margins and weigh on sales volumes.

At today’s prices, though, I think both are Black Friday buying opportunities for my portfolio. They are businesses that are relatively easy to understand and trade at what look like good prices today.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Berkshire Hathaway, Diageo Plc, and Unilever Plc. The Motley Fool UK has recommended AstraZeneca Plc, Diageo Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

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See the full investment case

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