S&P: Buffett Bets

02/27/2004 12:00 am EST


Sam Stovall

Chief Investment Strategist, CFRA Research

"Our analysts have screened our stock database to find issues that satisfy the six investment criteria used by Warrant Buffett," says Sam Stovall, chief investment strategist at Standard & Poor's. The latest issue of The Outlook covers the stocks that fit these parameters.

"Buffett has earned superstar status in investment circles for the way he generates strong gains in the investment portfolio for his insurance holding company, Berkshire Hathaway. Unlike many financial gurus who keep their stock-picking styles secret, Buffett is very open about the way he looks for investment opportunities. We have screened our database for Buffett-style stocks each year, using the following criteria:

  • Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $20 million.
  • Net profit margin of 15% or more.
  • Return on equity of at least 15% for each of the last three years and the most recent quarter.
  • A dollar’s worth of retained earnings creating at least a dollar’s worth of shareholder value for the last five years.
  • Elimination of overvalued stocks. Overpriced stocks are removed by comparing discounted cash flow five years from now with the current price.
  • Liquidity. Only stocks with a market capitalization of at least $500 million are included.

"We have run this screen for nine years. From February 13, 1995, through January 31, 2004, the screen had an annualized return of 17.7% vs. 10% for the S&P 500, excluding dividends. The screen generated a list of 34 stocks this year. It is important to note that these are not stocks that Buffett has purchased or has announced plans to purchase. They are merely stocks that meet criteria that Buffett has emphasized in the past. Two of the stocks have our top rankings for expected outperformance over the next 12 months. (The full list of 34 is below.)

"We expect higher revenues and earnings from investment manager Eaton Vance (EV NYSE) in fiscal 2004 (ending October), due to equity market appreciation and net inflows. Assets under management rose to $75 billion by the end of fiscal 2003, a 35% increase. We forecast earnings of $1.87 per share in fiscal 2004 vs. $1.51. We do not expect a material impact from continuing regulatory inquiries into the mutual fund industry, because Eaton Vance does not permit late trading and does not pay brokerage firms special incentives to sell only its funds, the two areas of regulatory and legislative actions at this time. We believe the shares should trade at a significant premium to the peer group, considering what we view as the company’s balanced asset base, consistent net inflows, low redemption rates, and prudent expense management. Our 12-month target is $44.

"Medtronic (MDT NYSE) is the largest pure-play medical device stock in our coverage universe. It has leading positions in most of the dynamic areas of the industry and represents one of the most compelling investments in the healthcare sector, in our view. We believe the company has particular strength in the cardiac rhythm management, neurological surgery, diabetes management, and spinal surgery areas. In our opinion, it is within these business segments that Medtronic offers investors a degree of product strength and revenue consistency that is unmatched by peers. Because we believe the company can widen its margins, we think it can surpass its goal of generating at least 15% growth in both sales and earnings over the next three years. We look for earnings of $1.61 a share in fiscal 2004 and see $1.90 in fiscal 2005. Our 12-month target is $58."

In addition, here is the full list of 34 stocks that pass S&P's Buffett-style screen:

Apollo Group (APOL NASDAQ)
AstraZeneca (AZN NYSE)
Barr Pharmaceuticals (BRL NYSE)
Biomet Inc. (BMET NASDAQ)
Check Point Software (CHKP NASDAQ)
Citigroup (C NYSE)
Doral Financial Corp. (DRL NYSE)
Eaton Vance (EV NYSE)
FactSet Research Systems (FDS NYSE)
Federated Investors (FII NYSE) 
First Data Corp. (FDC NYSE)
First Health Group (FHCC NASDAQ)
Forest Laboratories (FRX NYSE)
GlaxoSmithKline (GSK NYSE)
Graco Inc. (GGG NYSE)
Harley-Davidson (HDI NYSE)
H&R Block (HRB NYSE)
International Game Technology (IGT NYSE)
Johnson & Johnson (JNJ NYSE)
Lincare Holdings (LNCR NASDAQ)
Manufactured Home Comm. (MHC NYSE)
Medtronic Inc. (MDT NYSE)
Nuveen Investments (JNC NYSE)
Occidental Petroleum (OXY NYSE)
Oracle Corp. (ORCL NASDAQ)
Patina Oil & Gas (POG NYSE)
Petro-Canada (PCZ NYSE)
Renaissance Holdings (RNR NYSE)
SEI Investments Co. (SEIC NASDAQ)
Sigma-Aldrich (SIAL NASDAQ)
SK Telecom Ltd. (SKM NYSE)
Suncor Energy (SU NYSE)
T. Rowe Price Group (TROW NASDAQ)
Waters Corp. (WAT NYSE)

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