5 Potential Buffett Picks

The track record of master investor Warren Buffett inspires envy: 40-plus years of greater-than-20% annualized returns. That performance helped him build a more-than-$60 billion fortune -- among the largest in the world -- while doing something he loves.

Can you replicate that success? Perhaps not. But a number of money managers have approximated it by investing the same way Buffett has for decades -- and that's something you can do.

The blueprint
Of course, Buffett has historically tried to keep his methods and ideas under wraps. But page 25 of last year's Berkshire Hathaway annual report reveals a Willy Wonka-like glimpse into the inner workings of his empire. That's because Berkshire needs your help.

See, as the company's cash hoard grows, Buffett needs to add bigger and bigger businesses to the portfolio in order to keep returns high. But businesses that meet Buffett's high standards are difficult to find, so he's asked his shareholders to keep their eyes peeled. Buffett wrote that he's eager to hear from any firm that meets the following five criteria:

1.   At least $75 million in pre-tax earnings.

2.   Demonstration of consistent earnings power.

3.   Good returns on equity (ROE) while employing little or no debt.

4.   Management in place.

5.   Simplicity (if there's lots of technology, we won't understand it).

A master list for the master
Now, Buffett, for his part, is looking for private businesses he can buy whole-hog. But because none of us is likely to make a multibillion-dollar acquisition anytime soon, here are five publicly traded names that pass Buffett's sniff test:

Company

Industry

EBT*

5-Year EPS Growth

ROE

Long-Term Debt

Insider Ownership

Apollo Group (NASDAQ:APOL)

Education services

$550

13%

40.5%

$0

19.8%

Cohen & Steers (NYSE:CNS)

Asset management

$122

40.9%

28.9%

$0

60.8%

Hansen Natural (NASDAQ:HANS)

Soft drinks

$240

110.4%

46.2%

$0

7.1%

Pharmaceutical Product Development (NASDAQ:PPDI)

Life sciences tools

$248

30.5%

15.5%

$0

10.7%

Techne (NASDAQ:TECH)

Life sciences tools

$141

26.8%

21.9%

$0

6.8%

*Earnings before taxes, in millions. Data from Capital IQ, a division of Standard & Poor's.

While these are all promising businesses, the story doesn't end here. That's because Buffett also named a sixth criterion: an offering price.

Price may be the most important criterion of all. If you know anything about Buffett, then you know that he made his fortune not simply by buying great companies, but by buying great companies at great prices.

Pay for greatness
So what would Buffett pay for these five stocks? It's hard to say. The master keeps his specific valuation methods close to the vest. That said, I'm sure all five of these stocks are on the radars of Fool co-founders David and Tom Gardner in their Motley Fool Stock Advisor investing service.

And that's not surprising. Like Buffett, David and Tom look to buy shares of great companies at great prices. And like Buffett, their track record is impressive. Stock Advisor is ahead of the market, 56% to 19%, since the service's 2002 inception.

If you'd like to look at the stocks David and Tom are recommending today, join Stock Advisor free for 30 days. There's no obligation to subscribe, and you'll immediately have access to more than 80 recommendations that are worth your consideration.

This article was first published on May 7, 2007. It has been updated.

Tim Hanson owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Berkshire Hathaway is also a Stock Advisor and an Inside Value selection. Like Rudy, the Fool's disclosure policy can't fail.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 612557, ~/Articles/ArticleHandler.aspx, 12/19/2014 11:01:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement