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Warren Buffett has made his reputation as the World's Greatest Investor by taking the longer view—buying quality stocks with good earnings power and hanging on through bull and bear markets. During the last few decades, he has parlayed some well-chosen core holdings into an unparalleled performance record, not to mention an enormous personal fortune.
While the stock of Buffett's company, Berkshire Hathaway (BRK.A), has lagged the overall market in the past few years, long-time Berkshire holders are still sitting on impressive gains. Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 39 calendar years. If you had invested $10,000 in Berkshire in January, 1968 (the shares closed at $20.50 on the last trading day of that month), your holding would be worth more than $40 million today.
Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best-seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. With Hagstrom's book as a source, we at S&P have put together a stock screen that picks companies using criteria similar to those that fit the legendary investor's growth-oriented style. S&P updates this screen on a semiannual basis, during February and again in August.
Over the years, the screen has put in a pretty good performance itself. Since its inception on Feb. 13, 1995, through July 31, 2006, the screen had an annualized return of 15.3%, vs. 8.9% for the S&P 500. After lagging the "500" in 2005, the screen is back to its winning ways in 2006, rising 5.8% through July 31 vs. the index's 2.7% gain (all results are price appreciation only).
Here's how the screen portfolio has stacked up against the S&P 500 since inception:
Year
Screen Perf. (% chg.)
S&P 500 Perf. (% chg.)
*1995
31.4
27.9
1996
41.1
20.3
1997
11.5
31.0
1998
18.1
26.7
1999
18.0
19.5
2000
23.8
-10.1
2001
0.6
-13.1
2002
-12.7
-23.4
2003
31.0
26.4
2004
22.4
9.0
2005
-3.6
3.0
a2006
5.8%
2.7%
*From inception Feb. 13. Through July 31.
It should be noted that these are not necessarily stocks that Buffett has bought or ever personally plans to buy. The list reflects only the criteria that Buffett has emphasized in the past.
The full criteria for this screen:
1. Owner earnings (cash flow less capital expenditures) above $50 million (changed in February, 2006, from $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) 6. Market capitalization of $500 million or more
Overpriced stocks are removed by comparing estimated discounted cash flow five years from now with the current price.
Many of the stocks from the previous update of the portfolio in February, 2006, also appear in this edition. The screen continues to harbor quite a few financial issues, as companies in this sector typically feature high margins and high return on equity—key criteria for Buffett. Once again, a number of technology and energy concerns made the list as well. This time around, we note the presence of a number of European and Asian names.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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