News Analysis date published New: 
Tuesday, July 17, 2012 - 14:30
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Tuesday, July 17, 2012 - 14:30
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Tuesday, July 17, 2012 - 14:30

The Father of Value Investing Would Love These 2 Stocks

Tuesday, July 17, 2012 - 2:30pm

Billionaire investor Warren Buffett is known as the "Oracle of Omaha" due to his incredible investing success. He is considered the greatest stock picker of all time. This ability has earned him a place as one of the wealthiest men alive today.

Despite his vast wealth, Warren continues display a public persona of humility and common folk wisdom. This attitude has provided him the respect of working people as well as the ultra rich -- a very rare combination in this day and age. He does not believe in personal or family dynasties and has pledged to give away 99% of his wealth in his will. Recently, he joined forces with Bill Gates in a philanthropic trust arrangement to use his wealth for the betterment of mankind.

How did Warren Buffett obtain the skills and knowledge to create his empire? Many investors erroneously believe that he was simply lucky. Others are certain he was born with a gift for investing. Still, others think he must have some kind of supernatural stock picking gift unavailable to the everyday investor.

Well, nothing can be further from the truth.

Buffett learned his investing skills from Benjamin Graham, David Dodd and Phil Fisher. Fischer is considered a pioneer in the field of growth investing, while Graham and Dodd are considered the fathers of value investing. Graham and Dodd were professors at Columbia University, where Buffett received his MS in economics. They are also the authors of "Security Analysis," the seminal book on investing. Buffett describes himself as 85% Graham and 15% Fisher is his stock picking philosophy.

The three main ideas from Graham that Buffett attributes to his success are to look at stocks as individual businesses, use the market's fluctuations to your advantage and finally, be certain that there is a "margin of safety" built into all your investments. This stock picking method is widely known as value investing.

Value investing follows the idea of buying stocks that are underpriced according to fundamental analysis. In other words, stocks are bought at a discount to what is thought to be their intrinsic market price. This discount is what Graham considered the margin of safety.

Graham's margin of safety is what he stressed over and over again to Buffet and in his books. He taught that investors should be more concerned about the downside of the stock than the upside. In other words, watch the losses and the wins will take care of themselves. One way to assure a significant margin of safety is to buy stocks with strong balance sheets and industry dominance.

Here are two stocks that I think Benjamin Graham would love...

1. Petrobras (NYSE: PBR)

This Brazilian oil company has a monster market cap of more than $120 billion and should continue to thrive as Latin America develops economically. The company is sitting on a wealth of oil, with about 10.8 billion barrels of proven reserves in 2011. Not to mention, the company continues to strike huge oil finds, most recently in its Grana Padano offshore well.

The stock has a forward price-to-earnings ratio of 6.4 and a price of just under $20 per share, creating a compelling value picture.

Technically, the stock price has recently bounced off its lows and appears to be heading higher.

2. Vulcan Materials (NYSE: VMC)

This company is a U.S. based supplier of concrete and other construction aggregates, with a market cap of more than $5 billion.

Vulcan dominates its business because of its wide distribution network. Although its products are relatively inexpensive, they are very heavy, so it's extremely costly to transport. End users will always choose to purchase the materials closest to them due to the high cost of transportation. Therefore, even if Vulcan's prices were to be higher than a competitor, if a distribution center is closer the job site, Vulcan will win the business. Its wide distribution network assures that it will be the closest supplier in many regions -- exactly the kind of "wide moat" that Graham and Buffett covet in a company.

The housing and construction upturn in the United States has resulted in an uptrend in Vulcan's stock. And if the upturn continues, that can only mean good things for the company.

Risks to Consider: It's critical to keep in mind that just because a stock looks good from a value investing and technical view does not mean it is not subject to negative economic factors. China's growth slowdown could have a significant effect on both of these companies. Not to mention that the U.S. may not be completely out of the woods yet regarding housing and construction. Always position size properly and use stops, even when value investing.

Action to Take --> I like both these companies as long term breakout plays. Buying Vulcan on a close above $44 per share and Petrobas on a close above $20 per share provide a momentum cushion to the value investing fundamentals I mention above.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.