Famous investor Warren Buffett hasn't made his billions by buying expensive, overpriced shares. On the contrary, he's waited patiently to buy quality businesses when they are below what he considers their fair value, or when they are close to fair value but he has gained insights into a business' comparative advantage which can allow for meaningful growth for years to come.
Buy reasonably priced quality stocks
Macquarie Group Ltd (ASX: MQG) is forecast to produce strong earnings growth over the next few years, yet the investment bank's shares trade on a relatively undemanding price-to-earnings (PE) multiple (based on data provided by Morningstar) for financial year 2015 of 14.3x.
Primary Health Care Limited (ASX: PRY) offers exposure to defensive health care sectors including general practice and pathology which continue to enjoy a nice tailwind. Unlike some of its premium priced peers, Primary's shares trade on a forecast PE of just 12.8x.
Avoid expensive growth stocks
Navitas Limited (ASX: NVT) has built itself an enviable position within the education services sector thanks to its market-leading university pathway course offerings. Despite the quality of this company, with the stock trading on a PE of 20.6x current year earnings, the shares looks fully priced considering growth expectations and regulatory risks.
Ramsay Health Care Limited (ASX: RHC) remains a market darling amongst investors. With a total shareholder return over the past three years of 47.8% per annum and strong growth in earnings forecast over the next few years that's certainly understandable. Looking out as far as financial year 2017 however, the forecast PE of 23.2x makes the stock look fully valued.
