Markets & Finance

Stocks: Buy 'Em Like Buffett


S&P emulates Corporate America's expert investor with a stock screen that turned up 56 companies

Warren Buffett has established his reputation as the "World's Greatest Investor" by taking the longer view—buying quality stocks with good earnings power and hanging on through both 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.

The stock of Buffett's company, Berkshire Hathaway (BRK.A) topped the broader market in 2006 after underperforming for several years. Long-time Berkshire shareholders are now 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 $50 million today.

How does he do it? 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. Using Hagstrom's book as a source, we at S&P Quantitative Services 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 Jan. 31, 2007, the screen had an annualized return of 15.9%, vs. 9.6% for the S&P 500. After lagging the S&P 500 in 2005, the screen returned to its winning ways in 2006, yielding 18.2% vs. the index's 13.6% gain (all results are price appreciation only).

Here's how the screen portfolio has stacked up against the S&P 500 since its inception:

Year

Screen Performance (% chg.)

S&P 500 Performance (% 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

2006

18.2

13.6

*From inception Feb. 13.

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.

Here's a bit more information on how the screen works: Each time the screen is run, the stocks that were previously returned are "sold" and the new stocks are "purchased." There is 100% turnover each time the stock screen is run. 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); this helps remove overpriced stocks from the list

6. Market capitalization of $500 million or more

Many of the stocks from the previous update of the portfolio in August, 2006, also appear in this edition. The current edition contains a generous sampling of consumer products, energy, and technology outfits. Once again, we note the presence of a number of European and Asian names.

Click the image marked "S&P Promising Growth Portfolio" to the above right to read the full list, or click to the next page:

S&P Promising Growth Portfolio -- February 2007

Company

Ticker

Altria Group

MO

America Movil ADR

AMX

ASML Holding ADR

ASML

BG Group ADR

BRG

BHP Billiton Group ADR

BHP

Biomet

BMET

BJ Services

BJS

Brown & Brown

BRO

Brown-Forman

BF.B

Canadian National Railway

CNI

China Mobile

CHL

Cisco Systems

CSCO

Coach

COH

Cognizant Tech Solutions

CTSH

Cytyc

CYTC

Devon Energy

DVN

Diageo ADR

DEO

Eaton Vance

EV

Energen

EGN

Factset Research Systems

FDS

FLIR Systems

FLIR

Florida Rock Industries

FRK

Freeport-McMoRan Copper

FCX

Garmin

GRMN

Graco

GGG

Imperial Tobacco Group ADR

ITY

Infosys Technologies ADR

INFY

Intl. Game Technology

IGT

Intuit

INTU

ITT Educational Services

ESI

K-Swiss

KSWS

Marvel Entertainment

MVL

Methanex

MEOH

Moody's

MCO

National Semiconductor

NSM

Netease.com ADR

NTES

Novartis ADR

NVS

Nuveen Investments

JNC

Occidental Petroleum

OXY

Paychex

PAYX

Phelps Dodge

PD

T. Rowe Price Group

TROW

Qualcomm

QCOM

Rockwell Automation

ROK

Satyam Computr Serices ADR

SAY

SEI Investments

SEIC

Sigma-Aldrich

SIAL

Smith & Nephew ADR

SNN

TD Ameritrade

AMTD

Techne

TECH

Telefonos De Mexico ADR

TMX

UST

UST

Varian Medical Systems

VAR

Viropharma

VPHM

Votorantim Celulose ADR

VCP

Willis Group

WSH


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