| Searching
for Buffett-Like Stocks |
Published: June 28, 2006
Commonly referred
to as "The Oracle of Omaha" due to his Nebraska roots, Warren
Buffett is widely regarded as the world's most prominent value investor.
Thanks to an uncanny ability to spot undervalued companies and purchase
them on the cheap, Buffett has made many people very wealthy over the
course of his five-decade career -- including himself. Buffett's sizable
stake in Berkshire Hathaway (BRKa) -- the company he has managed for
several decades -- gives him a net worth of $42 billion, making him the
second-wealthiest person in the world behind only Bill Gates (according
to Forbes' 2006 list of the world's richest people). He is also one of
the very few who has amassed such astonishing riches primarily through
stock market investments. And finally, thanks to his recently-announced
donation to the Bill and Melinda Gates Foundation, he's also the
world's leading philanthropist.
Given his
extensive track record of above-average investing performance, it's not
surprising then that millions of investors around the world attempt to
mimic Buffett's unique value-oriented approach. In doing so, they tend
to look for companies with strong competitive advantages, positive free
cash flow, above-average returns on capital and quality management. They
also look for firms that are trading at a substantial discount to their
estimated intrinsic value.
In an effort to
incorporate these and many other Buffett-related strategies into our own
research, my staff and I ran a search for firms that meet many of Warren
Buffett's stringent investment requirements. With the above analysis as
a backdrop, we recently searched through our universe of 10,000 stocks
to find companies that met the following criteria:
-- Market
capitalization of greater than $100 million
-- ROE (Return on Equity) of greater than 10% in each of the last three
years
-- Positive FCF (Free Cash Flow) in each of the last three years
-- Substantial competitive advantages (as defined by our screening tool)
-- P/E (Price/Earnings) ratio below 20
-- FCF to Sales ratio of greater than 10% (based on trailing 12-month
data)
-- FCF to Market Capitalization ratio of greater than 5% (based on
trailing 12-month data)
Our goal was to
come up with a list of firms that are fairly large, reasonably valued,
and cash flow positive with strong returns on equity and significant
competitive advantages. After running this data through
StreetAuthority's advanced screening software, we came up with the
following list of companies:
| Company
(Symbol) |
Ent.
Value |
P/E |
ROE |
| Abbott
Labs (ABT) |
$68B |
19 |
24% |
| AstraZeneca
(AZN) |
$83B |
19 |
32% |
| Cadbury
Schweppes (CSG) |
$27B |
17 |
19% |
| Campbell
Soup (CPB) |
$17B |
18 |
52% |
| Equifax
(EFX) |
$5B |
18 |
35% |
| Fiserv
(FISV) |
$8B |
17 |
20% |
| Harley-Davidson
(HDI) |
$14B |
15 |
30% |
| IBM
(IBM) |
$130B |
15 |
26% |
| Intel
(INTC) |
$106B |
15 |
22% |
| Johnson
& Johnson (JNJ) |
$167B |
17 |
29% |
| Merck
(MRK) |
$70B |
16 |
26% |
| Microsoft
(MSFT) |
$198B |
16 |
30% |
| Total
System Services (TSS) |
$3B |
18 |
20% |
|
Although each of the above
stocks may be worth exploring further, as always, please make sure to do
your own due diligence on each of these firms to decide if they are
right for your portfolio. Any and all final investing decisions for your
own account are entirely up to you.
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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receive in-depth guidance on today's leading investing
opportunities each month, plus access to five model
portfolios, please subscribe to Paul Tracy's premium investment
newsletter -- the StreetAuthority
Market Advisor. |
Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
