Acing the Buffett Test

10/08/2015 9:00 am EST


Warren Buffett has earned a reputation as one of the preeminent value investors of all time. So, how does Buffett make his picks? Asks Beth Piskora in Standard & Poor’s The Outlook.

In his rare public remarks and widely followed annual letters to Berkshire Hathaway shareholders, Buffett makes it sound very simple: he says he buys stocks that are “available at a sensible price.”

The fact is, though, that 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.

One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.

Market capitalization of at least $500 million. For the S&P Capital IQ Warren Buffett portfolio, one more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

The table includes all of the stocks that meet all six requirements and have a STARS ranking of 4 or 5, our buy and strong buy ratings.

It is important to note these are not stocks Buffett has either purchased or announced plans to purchase. They simply meet the criteria that Buffett has emphasized in the past.

Altria Group (MO)
Amgen (AMGN)
Biogen (BIIB)
Canadian National Railway (CNI)
Celgene (CELG)
Discover Financial Services (DFS)
Eaton Vance (EV)
F5 Networks (FFIV)
Franklin Resources (BEN)
Gentex (GNTX)
Gilead Sciences (GILD)
Intel (INTC)
Johnson & Johnson (JNJ)
Las Vegas Sands (LVS)
Linear Technology (LLTC)
MasterCard (MA)
Monsanto (MON)
Qualcomm (QCOM)
ResMed (RMD)
Reynolds American (RAI)
St. Jude Medical (STJ)
T. Rowe Price Group (TROW)
Taiwan Semiconductor (TSM)
Union Pacific (UNP)

The S&P Capital IQ Warren Buffett (Intrinsic Value) Portfolio was launched on February 13, 1995.

Since inception through August 31, 2015, the portfolio posted an average annualized gain of 11.8%, outperforming the S&P 500’s (SPX) average annualized gain of 7.1% in the same period.

For the three years ended August, the portfolio rose 18.0%, outperforming the S&P 500’s rise of 11.9%. The portfolio is updated twice annually, in March and September.

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