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 investment performance, but also looked 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 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 and classifies value stocks as those with the highest book-to-market ratio and pegs 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 are highly rated by the CAPS community members. (You can run the same screen by clicking here.)
|
Company
|
TTM Return on Equity
|
Book Value Multiple
|
CAPS Rating
(out of 5)
|
|
General Electric (NYSE: GE )
|
15.3%
|
1.1
|
****
|
|
Cisco (Nasdaq: CSCO )
|
20.1%
|
2.8
|
****
|
|
Southern Copper (NYSE: PCU )
|
25.2%
|
5.0
|
*****
|
|
PepsiCo (NYSE: PEP )
|
36.1%
|
7.2
|
*****
|
|
Monsanto (NYSE: MON )
|
20.5%
|
3.6
|
****
|
Sources: Capital IQ, a division of Standard & Poor's, and CAPS as of July 9. TTM = trailing 12 months.
While these aren't meant to be formal recommendations, they're a great place to kick off some more research. In fact, why don't we start by taking a closer look at PepsiCo.
The anatomy of a growth stock
Liquid refreshment beverages -- or LRBs, as the acronym-happy PepsiCo refers to them -- have been the core driver of PepsiCo's success over the years. For the uninitiated, LRBs refer to beverages other than milk products, alcohol, tap water, and coffees and teas. In other words, we're talking about soda, bottled water, juices, and sports and energy drinks.
While the overall consumption of beverages in the U.S. grew only about 1% between 1999 and 2007, those LRBs stormed the market like Hannah Montana stomping all over the teeny-bop world, and posted growth in excess of twice the overall market rate. This created a great environment for Pepsi, as well as competitors like Coke (NYSE: KO ) , Dr Pepper, and smaller upstarts like Jones Soda (Nasdaq: JSDA ) .
More recently though, growth has been harder to come by, particularly in the troubled area of carbonated soft drinks (or CSDs, if you dig those acronyms). That means that PepsiCo has been focusing on fortifying its core Pepsi brand, while looking for growth in other areas such as snacks (Frito-Lay and Quaker), sports drinks (Gatorade), enhanced water (Propel, Aquafina Flavor Splash, and SoBe Lifewater), energy drinks (AMP), and other noncarbonated beverages, such as Tropicana juices, Naked Juice, and Lipton teas.
And of course, with international investing such a hot topic, I'd be remiss to skip over the fact that PepsiCo has seen strong overseas growth -- particularly from its operations in Asia, the Middle East, and Africa.
CAPS or bust
I've rated PepsiCo's stock an outperformer in CAPS; I'm only one of the 3,500-plus fans of the stock in the community. One of CAPS' top-performing members, hondo928, gave the stock a thumbs-up last fall, 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, Coke trades at a higher premium, and less 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 PepsiCo's prospects? Let the CAPS community know what you think by clicking over and sharing your opinion with the 135,000 investors already participating.
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