Berkshire Hathaway's 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 Buffett's superior track record, 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 researchers' definition of growth separates value and growth stocks based on the inverse of book value multiples. Stocks with the highest book-to-market ratio fall into the value category; those with the lowest are labeled 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. Still, this study does suggest that if we're looking for Buffett-esque stocks, our best bet is to search for high-quality companies, rather than rummaging 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 return 10% or more on their equity, trade above book value, and have been highly rated by CAPS investors. (You can run the same screen yourself, if you like.)
|
Company
|
Trailing-12-Month Return on Equity
|
Book Value Multiple
|
CAPS Rating (out of 5)
|
|
Altria (NYSE: MO )
|
81.9%
|
12.9
|
****
|
|
Procter & Gamble (NYSE: PG )
|
18.5%
|
2.6
|
*****
|
|
Garmin (Nasdaq: GRMN )
|
26.8%
|
2.1
|
****
|
|
McDonald's (NYSE: MCD )
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32.1%
|
5.1
|
****
|
|
Caterpillar (NYSE: CAT )
|
32.7%
|
3.7
|
****
|
Sources: Capital IQ (a division of Standard & Poor's) and CAPS as of June 10.
While these aren't meant to be formal recommendations, they're a great place to kick off further research. Why don't we start by taking a closer look at McDonald's?
The anatomy of a growth stock
The numbers go a long way toward explaining why investors and CAPS members alike seem to prefer McDonald's to competitors like Wendy's and Burger King (NYSE: BKC ) . Across the board, McDonald's financials show that it's a much more profitable and efficient company than the other burger shacks. Perhaps even more impressively, the company is only getting more profitable as time goes on.
It certainly doesn't appear that the organization is stagnating operationally, either. Despite McDonald's' size and age, the company is very growth-oriented and forward-thinking. In addition to taking on Starbucks (Nasdaq: SBUX ) with its McCafe offerings, the burger-slinger's also looking toward new chicken menu items, breakfast offerings, and longer hours to help drive growth.
And while the brand is certainly already well known internationally, it still has room for global growth. McDonald's is already firmly established in the U.S. and Europe, but currently, only about 13% of its operating income comes from its APMEA (Asia Pacific, Middle East, and Africa) region. Smells like opportunity to me.
CAPS or bust
Members of the CAPS community have been largely positive on McDonald's. Overall, 94% of the members who've rated the stock gave it a thumbs-up. Though that ratio isn't quite enough to qualify the stock for five-star status, it certainly makes it worth a hard look.
To get more specific on why the stock has been so well-received on CAPS, let's take a look at what CAPS member snootloop had to say late last month, when giving McDonald's an enthusiastic thumbs-up:
It's Mickey D's for cryin' out loud! There's really nothing more to say about this rock solid company that hasn't already been said by many who appreciate this juggernaut. Oh, I guess that their McCafe is probably going to be extremely well-received and another monster hit. This company just hasn't done much wrong over the past few years. Until I see some distress signals this joint is to be owned. Oh, and they pay a nice dividend if you haven't already heard.
But here's the real question: What do you think of McDonald's' prospects? Share your opinion with the 135,000 investors already participating in our CAPS community.
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