Buffett Style, Sleep-Well Stocks

03/26/2004 12:00 am EST

Focus:

Gregory Spear

Editor and President, The Spear Report

"When one embraces the sleep-well-at-night concept, however, it is best to approach it like Warren Buffett would," says Gregory Spear. Here, he reviews Buffett's investment approach, and offers some "sleep-well picks" that meet this criteria.

"Buffett requires that companies he buys have an ‘economic moat’ around them, i.e. a sustainable competitive advantage and a sustainable niche. Buffett looks ahead at least ten years. That's why he avoids technology, which can't be predicted that far out. So ‘sleep-well’ companies will be dominant companies with products or services that should remain in demand for a long time. Buffett also looks for a company's ability to grow in value at least 10% annually in virtually any economic environment. Interesting. Looking for consistent 10% growers has made Buffett the second richest man in the world. Meanwhile, when consumer staples start to outperform cyclical stocks, that is a sign the market believes the good economic news is already priced in. That has been the case since mid-January. We want to be emphasizing that sector now, if we want to sleep well at night.

"When we looked at Sysco (SYY NYSE) back in September the p/e was 27 and the market cap was 25% lower. That's not bad appreciation for a stodgy wholesale food retailer. After all, their business isn't rocket science. For one thing, there has been a lifestyle change in America over the last decade and as the boomers age we are more inclined to go out to eat. When we do, if we eat at a national restaurant chain, chances are that about 35% of what we consume at that restaurant was purchased from Sysco. The firm posted 27 consecutive years of earnings growth, and current estimates for 2004 come in at $1.41, up 19% from the $1.18 posted in fiscal 2003. We look at both the fundamental picture and the technical picture of every stock we profile. SYY has a monthly chart that looks like a 90s tech stock that never hit the wall. It is one of the most impressive uptrends you'll ever see.

"Sara Lee (SLE NYSE) is a global manufacturer of a wide variety of consumer products, from cake to Hills Brother's coffee to L'eggs stockings, Hanes underwear, and Playtex Wonderbras. The company has operations in 55 countries and sells into virtually every nation in the world. Revenues increased to approximately $200 million in fiscal 2003, from $22 million in fiscal 2002. Meanwhile, the company has been restructuring over the last few years and it is beginning to pay off. While earnings growth remains in the single digit range, new marketing initiatives are expected to drive them toward 10%...on top of a 3.5% dividend yield. Many corporate bonds don't even pay that much, and they are reliable. Sara Lee has paid dividends since 1946. The chart says SLE is about to make an attempt to break a multi-year downtrend. In fact, by some measures it has already begun a breakout. We like SLE as a long-term 'sleep-well' candidate."

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