Stock Screens

Stock Screen: Acing the Buffett Test


Warren Buffett has earned a reputation as one of the preeminent value investors of all time. His Berkshire Hathaway (BRKA) holding company has stakes in insurance, publishing, retailing, and manufacturing, among other businesses, and its investment portfolio includes more than $76.0 billion (as of Sept. 30, 2008) of marketable equity securities.

However, like others in the financial-services industry, Berkshire Hathaway has been hurt by a challenging economic environment. In 2008, the shares registered a decline of 31.8%, outperforming the S&P 500, which fell 37% for the year.

In recent months, Buffett disclosed he made investments, for Berkshire Hathaway's investment portfolio, in Dow Chemical (DOW), General Electric (GE), Burlington Northern Santa Fe (BNI), and Goldman Sachs (GS), among others.

The Method

But how does Buffett make his picks? What exactly is "Warren's Way?" In his rare public remarks, and widely followed annual letters to Berkshire shareholders, Buffett makes it sound very simple: He says he buys stocks that are "available at a sensible price." In fact, Buffett uses very sophisticated screens to determine which companies belong in his portfolio.

Specifically, he uses these five investment criteria:

• Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million.

• Net profit margin of 15% or more.

• Return on equity of at least 15% for each of the past three years and the most recent quarter.

• A dollar's worth of retained earnings creating at least a dollar's worth of shareholder value over the past five years.

• Ample liquidity. Only stocks with a market capitalization of at least $500 million are included.

In the Standard & Poor's "Warren Buffett" screen, we added one more criterion to eliminate overvalued stocks. Overpriced stocks are identified by comparing our five-year discounted cash flow (DCF) estimate with the current price.

The Names

The list that appears at the end of this story contains the 33 stocks that met the six requirements. For more info on the companies on the list, view this slide show.) This is a quantitative screen; the stocks listed are not necessarily recommended by S&P equity analysts. It is important to note that these are not stocks that Buffett has purchased or announced plans to purchase. They are simply stocks that meet the criteria that Buffett has emphasized in the past.

In 2008, the Buffett portfolio fell 39.4% vs. a 38.5% decline in the S&P 500 on a capital appreciation basis.

  S&P's "Buffett Screen," January 2009

COMPANY TICKER

Alcon ACL

America Movil AMX

Autodesk ADSK

Baxter International BAX

Becton, Dickinson BDX

BG Group BRGYY

British-American Tobacco BTI

Brown-Forman BFB

C.R. Bard BCR

Canadian National Railway CNI

Companhia Vale do Rio RIO

Frontline FRO

Genentech DNA

Grupo Televisa TV

McDonald's MCD

Noble Energy NBL

Novo-Nordisk NVO

Occidental Petroleum OXY

Oracle ORCL

Partner Communications PTNR

Potash POT

Qualcomm QCOM

Research In Motion RIMM

Reynolds American RAI

Royal KPN KKPNY

Schlumberger SLB

Shaw Communications SJR

Sigma-Aldrich SIAL

T. Rowe Price TROW

TD Ameritrade AMTD

Telekomunikasi Indonesia TLK

Tenaris TS

Turkcell Iletisim TKC

Howard Silverblatt is Standard & Poor's senior index analyst for its Index Services unit. In addition to general market research and commentary, he is responsible for the statistical analysis of Standard & Poor's family of U.S. indices -- including the world's most recognized index, the S&P 500.

Disclaimer: The Investing Insights blog entries are published by and reflects the personal views of Howard Silverblatt, in his individual capacity. It does not necessarily represent the views of his employer, Standard & Poor's (S&P) and is not sponsored or endorsed by S&P. The purpose of this blog site is to assist in dissemination of information about the securities markets, but no representation is made about the accuracy of the information. The information contained in this blog site is provided only as general information for education purposes, and blog topics may or may not be updated subsequent to their initial posting. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. The information contained in this blog does not constitute advice on the tax consequences of making any particular investment decision. This material is not intended for any specific investor and does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

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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