Bargain hunting on the stock market: These are the four cheapest stocks in Switzerland

Success proved him right: Buffett achieved the highest returns of his career while following this strategy; an average of 30 percent per year. So how exactly did the star investor fare? He was basically looking for companies that could be purchased below book value.

Young Warren Buffett’s strategy

In a simple version, the book value of a company’s equity is compared to its market value. But of course Buffett didn’t have it that easy. He analyzed a company’s balance sheet very carefully. He looked at each balance sheet item and adjusted the values ​​listed on the balance sheet to represent as accurate a reflection of reality as possible. When necessary, off-balance sheet assets and liabilities were also estimated.

At the end of the process, he subtracted adjusted liabilities from adjusted assets to find the adjusted book value. If a company’s listing was much lower than Buffett’s calculated book value, there was a good chance the stock market would soon correct that and the price would rise.

So Buffett didn’t just buy junk because it looked cheap, he also took the quality of the equity into account. If things look good, a company’s future prospects may also be bleak.

In the footsteps of Warren Buffett

Buffett’s investment success is difficult to replicate. But today’s automated stock screeners make it much easier to identify companies that might interest the young Buffett. To find such companies, the “Handelszeitung” relied on an important figure that many Buffett fans consider a suitable indicator of whether a stock is cheap: the price-to-book value ratio (P/B).

This ratio shows how much a company is worth on the stock market relative to its book value. The lower the ratio, the cheaper the stock looks. Book value is the value obtained by subtracting the company’s liabilities from its total assets.

If the share price is below book value (equivalent to a ratio value less than 1), this means the market is willing to pay too little for a company. This could be a sign that the stock is a bargain and is being overlooked by market participants.

The “Handelszeitung” therefore searched for all stocks in the Swiss SPI index with a P/B ratio of 1 or lower. However, smaller companies, especially those traded on the stock exchange, should be excluded as they pose additional risks. Therefore, the market value had to be at least 300 million francs.

Selection of “Handelszeitung”

The search process resulted in nearly three dozen stocks. We further reduced this figure by using a second filter for cheap stocks: To be included in the “Handelszeitung” list, a stock must have a low but still normal price-to-earnings ratio (P/E ratio); This ratio is defined as a value between 2 and 1. 12. Less than a dozen left in stock with this filter.

One would think that there is still plenty of material for bargain hunters. But not that fast. Because Buffett used a heavily adjusted book value. So far we’ve found cheap stocks using P/B and P/E ratios, but the minimum quality filter seems appropriate.

This additional factor is intended to weed out companies that have too much debt, as it can quickly erode a company’s equity. The “Handelszeitung” therefore only considered companies with a debt ratio of 300 percent or less. This means that a large number of banks, as well as a financial company such as Leonteq, are out of action.

Thanks to these filters (minimum capital of 300 million francs, P/E ratio of 1 and below, P/E ratio of 2 to 12 and maximum debt ratio of 300 percent) only four companies remain on our list of the cheapest companies on SPI:

• swatch
• vetropack
• romance energy
• Vaudoise insurance

These four stocks are by definition among the cheapest Swiss stocks. They also have some minimal quality features that reduce the risk of permanent capital loss. Because they are unusually undervalued relative to two criteria (price/book value and P/E ratio), they are less likely to fall significantly less than the market in a negative stock market environment (e.g. due to a recession).

Therefore, investors may consider including these stocks in their portfolios. Under these conditions: They understand what they are doing. And they should know that some stocks are cheap for a reason. There is no automatic mechanism to ensure that discounted stocks will inevitably lead to pleasant returns. So, even if these four stocks are chosen carefully, there is no guarantee. That’s why diversification is so important.