Berkshire Hathaway's (NYSE: BRK-A ) Warren Buffett is a value investor, right? Everyone knows that!
Well, don't tell that to Gerald Martin and John Puthenpurackal of American University and UNLV. In 2008, the two completed what they call "the first rigorous examination of Berkshire Hathaway's investment performance" -- a paper that analyzed not only the superior investment performance of Buffett, but also his investing style.
Besides concluding that Buffett's superior investment returns since 1976 were more than just luck -- as if we didn't know that already! -- Martin and Puthenpurackal concluded that Warren Buffett is... wait for it... a large-cap growth investor.
The definition of growth that the researchers used was one that separates value and growth stocks based on the inverse of book value multiples, then classifies value stocks as those with the highest book-to-market ratio and growth stocks as those with the lowest. According to the paper, growth stocks accounted for more than 40% of Berkshire's investments, while true value picks made up less than 20% of Buffett's buys.
But let's not get too crazy here. After all, Buffett is still very much a value investor by his own definition -- that is, he only buys stocks that offer a discount to the company's intrinsic value. But what this study does suggest is that if we're looking for Buffett-esque stocks, our best bet is to look for high-quality companies rather than rummage through the bargain bin.
To track down stocks that might fit the bill, I've enlisted the help of The Motley Fool's CAPS community and its stock screener. I focused my search on stocks that are returning 10% or more on their equity, are trading above book value, and are rated highly by CAPS community members. (You can run the same screen by clicking here).
|
Company
|
Return on Equity (TTM)
|
Book Value Multiple
|
CAPS Rating
(out of 5)
|
|
PepsiCo (NYSE: PEP )
|
36.3%
|
6.7
|
*****
|
|
General Electric (NYSE: GE )
|
12.1%
|
1.5
|
****
|
|
Yum! Brands (NYSE: YUM )
|
211.0%
|
34.2
|
****
|
|
XTO Energy (NYSE: XTO )
|
10.5%
|
1.4
|
*****
|
|
Waste Management (NYSE: WM )
|
15.9%
|
3.0
|
*****
|
Source: CAPS as of Oct. 7. TTM = trailing 12 months.
While these aren't meant to be formal recommendations, they're a great place to kick off more research. In fact, let's start by taking a closer look at Motley Fool Income Investor recommendation PepsiCo.
The anatomy of a growth stock
To a large extent, it's Pepsi that makes PepsiCo tick. The beverage is the company's flagship brand, and the company's PepsiCo Americas Beverages division made up 25% of its total 2008 revenue. But that Americas beverage stronghold has also been struggling lately and reported a 9% decline in revenue and profit in the second quarter.
So it's been outside of that huge beverage division that investors have seen Pepsi's opportunity lately. Frito-Lay and its tasty assortment of snacks like Doritos and Lays potato chips have continued to chug forward. Maybe even more promising, though, are the company's international divisions -- particularly in Asia -- which have shown plenty of pep.
Looking ahead, the company has been focusing on three primary areas to stimulate growth and increase profitability. First, it's addressing the tough economy and pinched consumers by emphasizing the value of its products. Next, the company is making its delivery systems more efficient -- an effort that includes the recent acquisition of its two largest bottlers. And finally, it's spending research and development dollars to help it create new and better products and adapt current products to worldwide markets.
CAPS or bust
On CAPS, Pepsi's stock carries a perfect five-star rating with more than 3,600 outperform calls versus just 118 underperforms. CAPS member hondo928, who is ranked in the top 1% of all CAPS members, gave Pepsi a thumbs-up a year ago, saying:
Cheap as dirt at this price, yes the P/E isn't great but they are very safe, and have some of the best management in the whole world, [Coca-Cola (NYSE: KO ) ] trades at a higher premium, and … has a less diversified product offering, something that Pepsi has an advantage with. They are more than just a soda company.
But here's the real question: What do you think of Pepsi's prospects? Let the CAPS community know what you think by sharing your opinion with the 140,000 investors already participating.
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