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7 Warren Buffett-Inspired Canadian Stocks to Buy in August

close-up photo of investor Warren Buffett
Image source: The Motley Fool

Legendary value investor and multi-billionaire Warren Buffett employed a widely successful investing strategy. He didn’t just buy into the hyped stocks of his time but used a preconceived stock selection criterion that targeted investing in great businesses with identifiable and defendable moats and excellent management teams.

A 1999 book by Mary Buffett (Warren’s former daughter-in-law) and David Clark titled Buffettology is accredited for explaining the billionaire investor’s mathematical techniques in screening for profitable stocks to buy. A Buffettology stock screener developed to use Warren Buffett’s stock selection criteria on North American-listed companies returned several dozen tickers today, including Apple stock.

Interestingly, Canada is well represented. Seven of the Buffettology screen results are TSX-listed companies, which I have listed below.

COMPANY TICKER COMPANY TICKER
Alimentation Couche-Tard (TSX:ATD.B) PyroGenesis Canada (TSX:PYR)
Canadian National Railway (TSX:CNR) CI Financial (TSX:CIX)
Canadian Pacific Railway (TSX:CP) Enghouse Systems (TSX:ENGH)
Calian Group (TSX:CGY)

Two of the screened companies could be great buys in August. Let’s have a look

A high-tech industrial process innovator

PyroGenesis Canada (TSX:PYR)(NASDAQ:PYR) stock remains a top-buy candidate for 2021. The $763 million Canadian high-tech industrial firm designs and manufactures advanced plasma systems that are crucial in enabling manufacturing firms like steelmakers to move away from dirty coal-powered furnaces to clean energy globally.

The company has won key contracts in the U.S. defence industry and is advancing in the metallurgical, mining, and other industry verticals — especially in aluminum and zinc dross recovery, where its globally patented technology has significant competitive advantages. The company’s global patents create defendable moats. PyroGenesis’s technology is finding uses in new industries, including a ballooning lithium battery industry. An expanding addressable market will enable strong business growth.

PYR stock was up 229% by mid-February on a year-to-date (YTD) basis. However, shares have given up most of the gains over the past five months but still retain a 26% YTD gain. The recent weakness coincides with sequential quarterly revenue declines seen in the last two most recent reports. I think the weakness is seasonal.

Watch PYR stock on Thursday

The recent weakness in PYR presents a good buying opportunity. The company historically reported a stronger third quarter in 2019 and in 2020, followed by two sequentially weaker quarters (revenue growth last reported at 771% for Q1 2020).

A surprise Warren Buffett type of stock! PyroGenesis Canada Quarterly Revenue (Q3 2019-Q1 2021)

PyroGenesis Canada Quarterly Revenue shows emerging seasonality. (Source: TIKR Terminal)

PyroGenesis will release its second-quarter results on Thursday, August 5. Revenue has been higher in the second quarter before setting new records by September. If we see the same trend this year, PyroGenesis’s revenue and probably its stock price could rise again in August through to early 2022.

The company has a clean balance sheet. It is a founder-led company, and its founder and CEO, Peter Pascali, owns and controls about 50% of the company’s stock on a fully diluted basis.

Canada’s largest railroad stock pops up on Buffettology screener

It is not surprising that Canadian National Railway (TSX:CNR)(NYSE:CNI) shows up on a stock screen modeled after Warren Buffett’s investing strategy. After all, the Warren Buffett-led conglomerate Berkshire Hathaway is heavily invested in the U.S. railway industry through its subsidiary BNSF Railway.

CNR stock rallied in 2020, as investors fell in love with businesses with strong cash flow-generating capacity and high survival capabilities during the height of the COVID-19 pandemic. Shares have taken a breather so far this year, and investors have yet another opportunity to load up for the long term at a lower CNR stock price right now.

CN Rail is busy digitizing its railroad operating processes. Technology investments could the company report productivity improvements and better cost efficiencies over the coming quarters.

Buffett values strong cash flow-generating businesses highly. Despite a surge in CN Rail shares in 2020, shares remain fairly valued and a good buy in August.

Canadian National Railway total stock valuation (Market Cap/Free Cash flow). Oct 2018-Aug 3 2021

Canadian National Railway (TSX:CNR) stock valuation (Market Cap/Free Cash flow) multiple shows undervaluation in August. Source: TIKR Terminal.

Actually, CN Rail stock appears undervalued right now, as its forward market-capitalization-to-free-cash flow multiple hovers lower than its general level over the past three years. The company has only traded at such low levels during the market crash drops of early 2019 and the April 2020 pandemic-induced plunge.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any stocks mentioned. The Motley Fool owns shares of and recommends ALIMENTATION COUCHE-TARD INC, Apple, Berkshire Hathaway (B shares), and Enghouse Systems Ltd. The Motley Fool recommends Calian Group Ltd. and Canadian National Railway and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple.

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