It was reported that Warren Buffett’s Bershire Hathaway had increased its stake in Kraft to 138.8 million shares from 132.4 million. Being a little skeptical, I checked the P/B ratio and P/E ratio of Kraft to see if it was indeed ‘under-valued’ when the king of ‘value investing’ made the purchase. Here is the finding: P/B Ratio: 1.8 and Current P/E Ratio: 20.4 (and it has been +/- 20 recently). If we strictly go by the academic definition, with P/B ratio>1, Kraft is not traded ‘under-book-value’ technically. So, does it mean that Warren Buffett has deviated from his ‘value investing’ framework? Well, not necessarily. In my opinion, in a gist, the rationale behind value investing is about value for money. Before Warren Buffett makes a purchase, as long as the price is ‘reasonable’ and he sees the growth in value, he will make the move. The reasonable price does not always mean one that is below book value. In fact, what Warren Buffett or an experienced value investor finds worth paying for is the book value + ‘something extra’. This ‘something extra’ can be something tangible or intangible such as business fundamentals, brand name, potential revenue and earnings growth, market demand, products, management, recession-proof, etc. Kraft has good business fundamentals, strong earnings and is recession-proof which made Warren Buffet believe that it was reasonable to pay a price at 1.8x its book value. (Well, how much is unreasonable? Only Warren Buffet would know.) Also, today, with information and news about corporates being widely available and transparent on the internet, the chances of good and undervalued stocks go unnoticed are very low, market reacts faster and prices are adjusted quicker as compared to the past, good and undervalued stocks will soon become not-undervalued. Therefore, we cannot blindly apply the ‘hard figures’ that were used during Benjamin Graham’s days (such as very low PE and PB<1) in today’s context. Even if we spot a handful of stocks that fulfill such hard criteria, the companies that are indeed being traded below book value could be ones that are really in deep trouble and hence the situation is reflected on the stock prices. For Kraft’s case, both P/B ratio and P/E ratio are considered not high as compared to many other growth stocks in the market, and coincidentally, these numbers are not far from the ‘benchmark’ figures used by my friend ET as he mentioned earlier: PE=15, PB=2.
So Kraft is a good buy. Say cheese. 🙂
Infinite Wealth 