If there is an indicator to measure whether the company is good or not from Buffett’s perspective, it’s believed that most investors will choose ROE (Return on Equity). According to some investors’ statistics, the investment return of the company with higher ROE is significantly higher than the market’s average return on investment (ROI).
“Based on the performance of all A-shares, during 1st Jan. of 2016 to 1st Jan. of 2019, the return of the Shanghai Composite Index is -25.21%, and the return of Growth Enterprise Index is -50.68%. However, the return of the company with ROE over 10% is -16.35%, while the return of the company with ROE over 15% is 10.15%. It seems that the differences will be more obvious if lengthen the time range, “during 1st Jan. of 2008 to 30th April of 2019, the Shanghai Composite Index decreased by 41.62%, while the share price of the company with ROE over 10% for ten consecutive years rose 131.12%.”
More importantly, the average ROE of China Medical System (CMS) has maintained more than 20% for a decade, which is rare among companies in pharmaceutical industry and the whole A+H shares.
If ROE is Buffett’s first priority in company selection, PE may be the indicator for him to determine the timing of investment since Buffett’s stock-picking philosophy can be summarized as “finding a business with a wide and long-lasting moat + the reasonable price with margin of safety”. However, the valuation of CMS is now only 7.3 times PE-TTM.
What does the 7.3 times PE mean? It should be the valuation of the cyclical stocks rather than the pharmaceutical stocks! Moreover, in terms of the dividend yield ratio (DYR), the DYR of CMS is over 5% in 2019.
Looking at Buffett’s investment history, we could find out that he often buys shares of the leading consumer-goods companies with strong profitability such as Coca-Cola at bargain prices when market undergoes systemic risks or the company suffers crisis. As we all know, with the gradual release of policy risks, the prices of many pharmaceutical stocks have halved or suffered even greater decline in 2018-2019, and the stock price of CMS once dropped by 70%. Therefore, it’s the right time to invest in CMS.