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:
Screen Performance (% chg.)
S&P 500 Performance (% chg.)
*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
America Movil ADR
ASML Holding ADR
BG Group ADR
BHP Billiton Group ADR
Brown & Brown
Canadian National Railway
Cognizant Tech Solutions
Factset Research Systems
Florida Rock Industries
Imperial Tobacco Group ADR
Infosys Technologies ADR
Intl. Game Technology
ITT Educational Services
T. Rowe Price Group
Satyam Computr Serices ADR
Smith & Nephew ADR
Telefonos De Mexico ADR
Varian Medical Systems
Votorantim Celulose ADR