Warren Buffett is famous for his legendary investment skills as well as for his way with words. Let's take a look at some of his best-known quotes and how they could apply to Seven Group Holdings Limited (ASX: SVW).
"Be greedy when others are fearful"
Seven Group is a diversified media, mining, energy and investment conglomerate. It owns WesTrac Pty Ltd (the company holds exclusive distribution rights for Caterpillar's mining equipment in the Asia Pacific region) and has a controlling stake in Seven West Media Ltd (ASX: SVW) (which in turn owns West Australian print assets and Seven Network). Seven Group also actively manages a diversified investment portfolio valued at $1.1 billion, largely comprised of energy stocks and direct property holdings.
Current market gloom has made investors weary of Seven Group's prospects in its core businesses for four reasons:
- A slowdown in mining has hit WesTrac's profit as demand for its equipment hits all-time lows.
- A rise in internet usage has disrupted conventional free-to-air television, causing ratings to fall.
- Low consumer confidence has decreased media advertising spend, affecting revenue from print.
- A slump in oil prices has affected Seven Group's returns on its investment portfolio.
The simultaneous downturn in all of Seven Group's businesses has created the perfect storm of fear. In Buffett's view, times of fear often present the perfect time to be greedy. The current climate might put Seven Group on his radar.
"Assume the market does not reopen for five years"
Another pearl of wisdom from the great man is to never buy companies for short-term gains; instead, focus on buying quality businesses.
Seven Group arguably ticks this requirement too. Although pessimists may argue that mining is doomed, that the internet has killed media and that anaemic global growth will persist for the next decade, the inevitable truth is that every economy works in cycles. Whilst we are admittedly at a low point for mining, commodities and consumer confidence, the fact is that they will recover over the next decade. The result should be a rebound in earnings for all of Seven Group's divisions.
Considering that it owns a $1 billion investment portfolio, it appears that Seven Group's current market capitalisation of $1.45 billion undervalues all other operations. This is despite Seven Group controlling the number one television station nationally and holding the Asia-Pacific distribution rights to the biggest mining equipment maker in the world.
Therefore, if you assumed the share market closed today and did not reopen for five years, it's likely that Seven Group would be in a better position because of the quality of its businesses when the economy recovers. Accordingly, any short-term movements in price should be irrelevant to the long-term success of this stock.
"Rule Number 1 – Don't lose money"
Buffett may be a fan of Fight Club because his second rule is: "don't forget rule number 1". The point is that Buffett takes losing money very seriously. Any investment he makes must compensate him by providing a satisfactory return (in real dollar terms).
In Seven Group's case, that return is its annual dividend. At current prices, Seven Group trades on a fully-franked yield of 8.5%. The yield is funded by the investment portfolio, so any turnaround in media, mining or energy should see the payout grow.
Seven Group's management is currently performing an on-market buy-back to take advantage of the fall in share price. This initiative should support its share price against further weakness in the short-term and minimise the chance of losing money over the long term.
Foolish takeaway
Whilst I don't actually know what Buffett will buy next, a certainty is that he will be patient. Likewise, investors need to be patient with Seven Group as its core businesses recover from their cyclical lows.
Although a purchase in Seven Group is not without risk, I believe the company will provide long-term value by rewarding the patient investor with capital growth and a solid income stream in the interim.
