Picking Stocks, Buffett-Style
businessweek.com
S&P's latest screen -- based on investing criteria used by the Oracle of Omaha -- turned up 23 promising growth stocks
Braverman is senior investment officer for Standard & Poor's
Warren Buffett didn't earn his reputation as a legendary investor for nothing. His company, Berkshire Hathaway (BRK.A ), has registered a compound annual return of around 22.3% over the last 36 years. If you had invested $10,000 in Berkshire in 1965, your holding would be worth more than $50 million today.
While equaling Buffett's record would be difficult, if not impossible, investors can still learn a thing or two from his investing discipline. With that in mind, Standard & Poor's has put together a stock screen inspired by the book The Warren Buffett Way: Investment Strategies of the World's Greatest Investor by Robert Hagstrom. S&P updates this screen on a semiannual basis during the first week of February and August.
The screen works by selecting stocks using criteria similar to Buffett's growth-oriented style of investing at Berkshire Hathaway. And it has worked pretty well. For the five years ended December, 2001, the screen stocks rose 157.1% -- handily outperforming the S&P 500 index.
STRONG RECORD. S&P initiated this screen on February 13, 1995. For the remainder of 1995, the selected stocks rose 31.36%, vs. 27.88% for the S&P 500. In 1996, the screen stocks returned 42.21%, vs. 20.26% for the S&P 500.
During 1997, the screen stocks rose 11.49%, vs. 31.01% for the S&P 500. In 1998, the screen was up 18.12%, vs. 26.67% for the S&P 500. In 1999, the screen gained 17.96%, vs. 19.53% for the S&P 500. In 2000, the screen climbed 23.2%, vs. a drop of 10.1% for the S&P 500.
And last year? The screen was down only 5.55%, vs. a drop of 13.05% for the S&P 500. Overall, since inception, the screen stocks were up 240%, vs. 134% for the S&P 500. (All performance figures are before dividends and transaction costs.)
WHERE'S TECH? The screen's performance in 2001 reflected the presence of many small- and mid-cap stocks -- sectors that outperformed the market last year -- and a notable absence of technology issues. Many of the stocks from the last update, in August, are still on hand in this edition. The new screen contains quite a few health-care and financial stocks, as companies in these sectors typically feature high margin and high return on equity -- key criteria for Buffett.
To avoid stocks that are having only a temporary surge in profitability, S&P now looks for a return on equity above 15% for the most recent quarter and for each of the last three years.
The full criteria for this screen:
1. Owner earnings ( cash flow less capital expenditures) above $20 million
2. Net margins of at least 15% for the trailing 12 months
3. Return on equity of at least 15% the previous quarter and in every year for the last three years
4. Retained earnings that have grown less than the market capitalization, on an absolute basis, in the last five years
5. Looking five years into the future, projected cash flow per share greater than the current market price for each stock (discounted to the present using the 30-year Treasury yield)
It should be noted that these are not necessarily stocks that Warren Buffett has bought or ever personally plans to buy. This screen only reflects criteria that Buffett has emphasized in the past.
This time around, the screen turned up 23 stocks:
Americredit Corp. (ACF )
Brown & Brown (BRO )
Citrix Systems CTXS )
Dionex (DNEX )
Doral Financial (DORL )
Eaton Vance (EV )
Financial Federal (FIF )
First Health Group (FHCC )
Glaxo SmithKline (GSK )
International Game (IGT )
Lilly (LLY )
Lincare Holdings (LNCR )
Linear Technology (LLTC )
Merck (MRK )
MGIC Investment (MTG )
Oracle (ORCL )
PMI Group (PMI )
T Rowe Price (TROW )
Schering Plough (SGP )
SEI Investments (SEIC )
Techne (TECH )
Telefonos de Mexico (TMX )
Total System Services (TSS ) |
