Warren Buffett is a great investor, but he really can not do everything that we, as individual investors, can do. Some investors may not realize that we have an advantage over Buffett in some ways.

Let’s say Buffett found a great insurance company with a market cap of $400 million. We know that Buffett loves insurance companies.

One news story recently highlights Buffett’s love of the industry, “Feb. 22, 2019, it will be 52 years to the day since Warren Buffett took his first serious dive into the insurance business when Berkshire Hathaway  entered into an agreement to acquire National Indemnity Company and another smaller insurer for $8.6 million.

National Indemnity is still a part of Berkshire Hathaway 52 years later, and one that Warren Buffett values highly. In fact, Warren Buffett told shareholders in 2004 that if Berkshire hadn’t acquired National Indemnity, “Berkshire would be lucky to be worth half of what it is today.”

To put it mildly, Buffett loves the insurance business. Since acquiring National Indemnity, Buffett and his team have made many other insurance additions, including GEICO in 1996, General Re in 1998, and more.”

Insurers invest the money they collect as premiums that have not yet been paid out for claims. This cash flow is referred to as the float in the industry.

Experts note, “Most insurance companies invest the majority of their float in low-risk investments. For an example, think Treasury securities and some corporate bonds. Buffett, on the other hand, takes a somewhat different view and has used the float held by Berkshire’s insurers to invest in equities and acquisitions of other companies.”

Yet, it seems fairly certain that if Buffett found an excellent $400 million insurer, he would not buy it.

That’s less than 0.01% of the value of his investment portfolio. If the insurer does great and doubles in value Buffett would increase the value of Berkshire Hathaway by less than 0.01%.

More realistically, let’s say he gets a 20% return on his investment. That increases his portfolio value by $80 million or less than 0.002%. 

Buffett made $500 million a year in dividends on an investment in Goldman Sachs that he made in the depth of the 2008 bear market. This is the kind of return he needs to continue growing Berkshire and given that requirement, he simply can’t look at small caps.

This is where we, as individual investors, have an advantage over Buffett. We can buy small cap stocks because 20% gains mean a great deal to us. One way to exploit this advantage is to study Buffett’s deals and apply his valuation principles to small caps.

Finding Break Out Patterns

We could quantify the kind of stock we believe Buffett likes. In the letter to shareholders he writes every year, Buffett has mentioned that he measures management with an accounting tool called return on equity (ROE).

The is the ratio of net income to shareholders’ equity. ROE measures the percent of profit management is earning with the money shareholders invested in the company. ROE can vary by industry so a detailed analysis is usually needed to understand how well management is performing relative to its peers.

For our purposes, we are looking for the best small caps so we will require companies to have an ROE of at least 15%. This level is better than the ROE reported by about 70% of all publicly traded companies. This limits our search to the best management teams in the country.

We could also require the company to have a higher than average return on assets and a history of increasing sales. By requiring that sales be increasing over the past five years, we are eliminating stocks which have no operating cash flow and that could be headed towards bankruptcy.

One way to find stocks meeting these requirements is with the free stock screening tool available at FinViz.com. At this site, you could screen for a variety of fundamental factors, high levels of institutional ownership and bullish institutional transactions Or, you could just screen on new highs. An example is shown below.

Source: FinViz.com

For this screen, we selected stocks that Warren Buffett might like and that are too small for him to realistically take a significant stake in.

This screen is a reasonable starting point for additional research. There is no guarantee any of these stocks will deliver gains and risk should always be considered. It’s also important to remember that screens like this will not identify unique risk factors.

Stocks passing the screen are shown below.

Source: FinViz.com

Aeterna Zentaris Inc. (Nasdaq: AEZS) is thinly traded but prone to make large moves.

A stock like this could be bought and sold by aggressive traders looking for small gains. For example, a buy could be made and immediately after that order is filled, a profit taking sell order could be entered. If the stock spike higher, as it has in the past, a strategy like that could deliver gains.

Abraxas Petroleum Corporation (Nasdaq: AXAS) is in a down trend.

But the stock is in the energy industry and many experts believe there is bullish potential in this sector.

Harrow Health, Inc. (Nasdaq: HROW) is also in a down trend and could be attractive to value investors looking for a turn around.

PEDEVCO Corp. (NYSE: PED) is in a trading range and could be prone to make large moves on news. This could be a stock of interest to the most aggressive investors.

Luna Innovations Incorporated (Nasdaq: LUNA) is in an up trend and could be a stock that interests momentum investors.

These stocks could all deliver significant gains or could all prove to be worthless. That is the risk of any investment but the potential gains in small cap stocks can be large while the potential risks are limited to the price paid at the time of purchase.

Each of these stocks, in particular, could be worth additional research since they display at least one quality Warren Buffett could look for.

While very few things seem to be certain in the stock market, there is one statement that seems to hold a high degree of certainty. It is almost certain that Tesla (Nasdaq: TSLA) will always be in the news.

Last week, according to news reports, we learned that “Tesla’s assembly lines slowed and deliveries fell during a rocky start to the new year that is likely to magnify nagging doubts about the company’s ability to post sustained profits.

The company churned out 77,100 vehicles from January to March, well behind the pace it must sustain to fulfill CEO Elon Musk’s pledge to manufacture 500,000 cars annually.

The company only delivered 63,000 vehicles in the quarter, down 31% from 2018′s fourth quarter. It cited a big increase in vehicle deliveries to Europe and China and “many challenges encountered for the first time.”

The lower-than-expected delivery numbers and “pricing adjustments” will take a bite out of Tesla’s first-quarter net income, it said. But it said it ended the quarter with sufficient cash on hand.

Tesla said it still expects to deliver between 360,000 and 400,000 vehicles this year. The first quarter production figures lagged the 86,555 vehicles that Tesla manufactured during the final three months of last year when the company was scrambling to make more cars.

That push helped Tesla post a profit in consecutive quarters for the first time in its 15 year history.

Musk has already warned investors that the company will lose money during this year’s first quarter amid cost-cutting needed to lower the price of its Model 3, its first electric car designed for the mass market.

The company produced 62,950 Model 3s in this year’s first quarter, up 1.6% from 61,934 in the prior three months.

Musk has acknowledged that Tesla’s hopes of becoming a consistent moneymaker are riding on the success of the Model 3 and a sport utility vehicle called the Model Y scheduled to be released next year. And for those vehicles to become hits, Tesla will have to be able to produce them in high volumes.

The news weighed on the stock price.

A Competitor Emerges

Meanwhile, another automaker reported adjusted profit hit 44 cents per share, well above the $0.27 average analysts polled by Refinitiv projected. Ford (NYSE: F) is now at an important resistance level on the chart.

CNBC noted that the company is investing heavily in electric vehicles.

“[Ford] also hopes to become more nimble by learning from some of its partners, including Rivian. Ford invested $500 million in the Detroit-based battery-electric vehicle startup this week. The alliance will let Ford use Rivian’s skateboard-like platform for at least one, and likely several, future products.

“We are learning a lot from this wonderful company and their fresh approach,” said [one analyst], especially when it comes to operating at Silicon Valley speeds.

In turn, Rivian’s CEO R.J. Scaringe expects his own team to learn about high-volume manufacturing from the company that invented the movable assembly line.

The $500 million Ford plans to invest in Rivian comes on top of another $11 billion that it last year said would be spent to begin electrifying its line-up. Ford was an early pioneer in battery propulsion but has fallen behind rivals like Tesla, as well as GM and VW. It will only launch its first long-range electric vehicle – a high-performance crossover influenced by the Mustang – next year.

Ford also has been ramping up its spending on self-driving vehicle technology. Among other things, it invested $1 billion in Argo AI. With the startup’s help, Ford’s autonomous program is now considered one of the most advanced in the industry, according to Navigant Research.

It lags behind only such leaders as Alphabet’s Waymo and GM’s Cruise Automation.

Significantly, Ford is ramping up the number of places it is testing self-driving prototypes, Farley noted during the Thursday earnings call. While places like Phoenix and Silicon Valley have become ground zero for most of those working on autonomous technology, Ford has chosen places with challenging weather and traffic conditions that push the technology to its limits.

“We are picking cities like Miami (and Washington, D.C.) that are very complex,” said [an analyst].

One of the concerns that has nagged analysts and investors has been how Ford – or any of its competitors – will turn money-losing battery car and autonomous vehicle programs into profit centers.

That’s something the recent management realignment is meant to address, [management] said in an interview. The changes will allow it to focus on what it can do to make money now while developing the businesses it will need in the future.”

Analyst caution that the automaker faces a “volatile environment with very strong competition.”

Indeed, a closer look at the first-quarter numbers reveals that while Ford performed well in its North American home – margins there climbing nearly a full point, to 8.7% – it faced significant problems in every other key market, from Europe to China.

While “there’s still some skepticism remaining,” Morningstar’s auto analyst David Whiston said, “sentiment has improved.”

Whiston, who currently rates Ford a buy, points to several positive factors, including the cuts now underway in Europe and South America, which should help profits in the future, and a broad product rollout, which could excite new buyers.

It seems investors are finally cheering the risky bets Ford is making to shift away from sedans and to invest in new technologies. And it comes at a time when the market is growing more wary of rival Tesla, which saw a sharp selloff after its earnings. The result: Ford’s market capitalization is now greater than Tesla’s for the first time since April 2017.

The long-term chart below shows Ford Motor Company (NYSE: F) is in a downtrend.

Investors should expect volatility as the company enters new markets. However, the investors in F may see better returns and less volatility than investors in TSLA while achieving exposure to the electric and autonomous vehicle markets more closely associated with Tesla.

Overall, F could simply be a safer way to trade these emerging technologies.

Value investing is one of the simple concepts in finance that is difficult in practice. The concept is to buy stocks that are undervalued, wait until they are fully valued or even overvalued to capture a profit, and repeat the process with an increasing amount of wealth.

Many investors are value investors, but no investor has attained the success of Warren Buffett, the billionaire value investor who brings unique insights to the process of wealth creation. One reason value investing is difficult could be the fact that so many investors are using the same information.

There is, after all, a limited amount of information available to investors. There is the financial statement which report less than two hundred individual pieces of information. Here, many investors ignore much of the information available and focus on just more popular data.

There could be thousands of investors looking for stocks with low price to sales (P/S) ratios, low price to book (P/B) values or low price to earnings (P/E) ratios. This can be useful but is unlikely to result in an unusual level of success since so many investors are looking at that same information.

In an effort to find something that other investors are missing in their analysis, there are some investors who will look beyond the financial statements but remain in the realm of publicly available information. There is also a series of regulatory filing including many footnotes to the financial statements.

This is a more complex challenge since the information may not be easy to access. But it could be more rewarding and many investors, especially professional analysts and portfolio managers, will look at less popular data. But they may not talk freely about what they do, concerned they could sacrifice their personal edge by sharing their methods.

When Investment Pros Talk, It Could Pay To Listen

Because not all professionals will talk, it can be useful to pay attention to the ones that do, especially when the investment pro goes in depth discussing their techniques.

Barron’s recently interviewed Gordon Haskett analyst Don Bilson who, they noted, “takes an even less traditional approach. He calls his research “event driven,” although other investors prefer the term “special situations.”

Many individual investors will share Bilson’s goal:

“I’m looking for events that can move a stock more than 10%: mergers and acquisitions and corporate restructurings, including spinoffs. Management change is a big one. Another is changes in the shareholder roster.

That usually comes after a series of missteps, and can be a turnaround opportunity. Shareholder activism is in there, too, and occasionally, environmental matters.”

What’s important to consider is whether or not individual investors can work towards that same goal and Bilson says his process is accessible to individuals, noting

“You’d be surprised…. Everything we do is traceable to publicly available information. We’re not really dealing so much in innuendo, but what, exactly, are companies saying on conference calls? And by exactly, I mean that we parse the adverb.

If the adverb changes from quarter to quarter, we’re the ones to amplify that. Corporations stick to scripts. When they change the script, it means a lot.

And it’s overlooked. If you’re not paying close attention to it, you’ll miss the important pivots that companies are telling you [about] without really telling you.”

Transcripts of calls, and previous calls for comparison, are available on a number of web sites for free. Some companies make the calls available on their investor relations web site so that an individual investor could listen to the tone of the CEO’s voice, just like analysts do.

Now, one of the reasons value investing is difficult is because investors can find value, buy the stock and then the stock fails to move. This is the risk of a value trap, a stock offering value but instead presenting a trap to investors which traps funds that could be employed elsewhere.

To reduce this risk, Bilson “We watch price action pretty closely—which stocks are moving; why are they moving. What’s the volume behind these moves? Who owns the stock?”

Hidden Information Might Be Hiding In Plain Sight

Bilson also looks at data that is publicly available but maybe often ignored by many investors, professionals and individual investors alike. One factor that could be overlooked, and that Bilson finds useful is:

“CEO age is important. Older CEOs are dangerous CEOs. Older CEOs are the ones who make moves. So we pay very close attention to 62-, 63-, 64-year-old CEOs, especially those without succession plans. Those are the people who make news.”

Barron’s followed up a question, “Where do you find information about CEO succession plans?” and Bilson responded,

“Sometimes, it’s obvious—say, a promotion to chief operating officer made by a 64-year-old CEO. That person is going to be the CEO in two years—or six months. Sometimes, it’s three years. Sometimes, the successor is pretty obvious. Other times, it’s not. You have to use a little guesswork.”

Many investors might wonder where the information about a CEO’s age is available and the truth is the information is relatively easy to find. It is in SEC filings and on websites like Yahoo which shows the data under the company profile, as shown below.

The fact they hired a CEO from outside the company is significant to Bilson who said, “…by and large, if you make a commitment, bring a new guy to a new city and set him up with a new [pay] package, that company is not going to be sold for X amount of years. So, in a sale situation, I’d much rather an internal promotion.”

This could make a deal difficult but not impossible. Other companies he likes include those involved in potential “M&A in the [Texas] Permian Basin. Finally, after so much talk about M&A last March or April, Concho Resources bought somebody.

Energen was then sold to Diamondback Energy, and now you’ve got QEP Resources (NYSE: QEP) up for sale. Probably, some other businesses in that region will go, as well.”

QEP is a cheap stock whose CEO is about 61 years old. This could be an ideal buy in the sector.