By David Braverman If Warren Buffett had only a short-term investing focus, he might be tearing his hair out. Take a look the recent underperformance of his company, Berkshire Hathaway (BRK.A).
The stock has lagged the broader market so far in 2005 (through July 29), falling 5.0%, compared with a rise of 1.8% for the large-cap Standard & Poor's 500-stock index. The issue also trailed the 500 in 2004, rising 4.3% vs. the benchmark's 9% increase, and in 2003, with a respectable gain of 16%, vs. the index's surge of 26%.
But of course, 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.
UNPARALLELED PERFORMANCE. The recent soft patch must be placed in the context of the overall results of Buffett's remarkable career. 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.
Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 38 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 bestseller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. Using 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, in February and August.
COMPARING NOTES. Over the years, the screen has put in a pretty good performance itself. In each of the past three calendar years, the portfolio has outperformed the S&P 500 by 9.1% in 2002, 4.6% in 2003, and a whopping 13.4% in 2004.
Since its inception on Feb. 13, 1995, through July 31, 2005, it had an average annual return of 16.2%, compared with 9.4% for the benchmark index. (All performance figures are before dividends and transaction costs.)
Here's how the screen portfolio has stacked up against the S&P over the years:
Screen Perf. (% chg.)
S&P 500 Perf. (% chg.)
*From inception Feb. 13.
aThrough July 31.
Many of the stocks from the previous update of the portfolio in February, 2005, also appear in this edition. The screen continues to harbor quite a few health-care and financial shares, as companies in these sectors typically feature high margins and high return on equity -- key criteria for Buffett. Once again, a sprinkling of technology and energy concerns made the list as well.
Here's our disclaimer. It should be noted that these aren't necessarily stocks that Buffett has personally bought or ever plans to buy. The list only reflects the criteria that he has emphasized in the past.
The full criteria for this screen:
1. Owner earnings (
cash flow less
capital expenditures) above $20 million
Net margins of at least 15% for the trailing 12 months
Return on equity of at least 15% the previous quarter and in every year for the last three years
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
The current version of the screen lists 58 names:
Apollo Group Inc.
Brown & Brown
Capital One Financial
China Mobile Hong Kong
Cognizant Tech Solutions
Doral Financial Corp.
Eaton Vance Corp.
Epicor Software Corp.
Erie Indemnity Co.
Factset Research Systems
First Data Corp.
Flir Systems Inc.
Gtech Holdings Corp.
Impac Mortgage Hldgs.
Integrated Circuit Sys.
Intl. Game Technology
J2 Global Communications
Johnson & Johnson
Legg Mason Inc.
Lincare Holdings Inc.
MEMC Electronic Mat.
T. Rowe Price
SEI Investments Co.
Shuffle Master Inc.
St. Jude Medical
Braverman is vice-president for Standard & Poor's Portfolio Advisors
Numer de Guia, CFA, and Michael Kaye, CFA, analysts for Standard & Poor's Portfolio Advisors, contributed to this article