Berkshire Hathaway's
Well, don't tell that to Gerald Martin of American University and John Puthenpurackal of the University of Nevada-Las Vegas. Last year, the two completed what they call "the first rigorous examination of Berkshire Hathaway's investment performance" -- analyzing not only Buffett's superior performance, but also looking at 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 Buffett is, wait for it, a large-cap growth investor.
In defining growth, the researchers separated value and growth stocks based on the inverse of book value multiples. They then classified value stocks as those with the highest book-to-market ratio, and pegged those with the lowest as growth stocks. 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 some 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 have been highly rated by CAPS community members (you can run the same screen by clicking here).
|
Company |
TTM Return on Equity |
Book Value Multiple |
CAPS Rating (max 5) |
|---|---|---|---|
|
UnitedHealth |
17.1% |
1.5 |
***** |
|
Philip Morris International |
48.5% |
7.3 |
***** |
|
Procter & Gamble |
18.7% |
2.7 |
***** |
|
Walt Disney |
14% |
1.2 |
**** |
|
SYSCO |
32.8% |
4.1 |
***** |
Source: Capital IQ (a division of Standard & Poor's) and CAPS as of Jan. 16; TTM equals trailing 12 months.
While these aren't meant to be formal recommendations, they're a great place to kick off some research. In fact, why don't we start by taking a closer look at SYSCO?
The anatomy of a growth stock
I think if there's any lesson that we could take away from the past decade, it's that your portfolio will thank you for sticking primarily to stocks of companies that are doing something you can understand, are making money, and have a justifiable valuation. Did all the investors in JDS Uniphase back in 2000 really understand fiber-optic communications and think that the $1,000 (split adjusted) share price was a reasonable valuation? Did buyers of UBS stock in 2007 -- when it was trading at nearly six times today's price -- really know what the man behind the curtain was doing? My guess is that the answer to both is no, in most cases.
Hey, no judgment here: I was a not-so-proud owner of the disaster known as Time Warner when it was still called AOL Time Warner. I can also claim to be a co-recipient of recent government largesse as a Bank of America
So, where do we turn?
Learn to love boring
Unless it starts some sort of food distribution derivative trading operations (a la Enron), we're unlikely to ever see SYSCO as manic Mr. Market's flavor of the week. Yet this stable, easy-to-understand business is exactly the kind of stock that could make a good addition to your portfolio for good times or bad.
As noted above, "growth stock" for our purposes here is defined by its book value multiple, not its revenue or earnings growth rates. That doesn't mean the company hasn't grown, though -- over the past decade, SYSCO has averaged revenue growth of more than 9% per year and earnings-per-share growth of more than 14%. As part of this package deal, you also get a nice 4% dividend, a very manageable balance sheet, and a set of ginsu knives. (OK, not that last one.)
SYSCO is a clear favorite on CAPS, with 95% of the CAPS members who rate it giving it a thumbs-up. CAPS All-Star brightsideLP is one of the recent bulls:
food distributor that took cost cutting and streamlining measures ahead of this downturn. No longer purchasing as 30 separate entities but as one purchaser....increasing margins and flexibility. Further expansion abroad would be a future catalyst and the management team is stellar.
CAPS or bust
But here's the real question: What do you think of SYSCO's prospects? Let the CAPS community know what you think by clicking over and sharing your opinion with the 125,000 investors already participating.
Further CAPS Foolishness:
