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 not only analyzed the superior investment performance of Buffett, 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 stocks that might fit the bill, I 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 |
Return on Equity (TTM) |
Book Value Multiple |
CAPS Rating
|
|---|---|---|---|
|
Oracle |
21.6% |
4.3 |
**** |
|
McDonald's |
32.1% |
4.9 |
**** |
|
National Oilwell Varco |
13.5% |
1.5 |
***** |
|
BHP Billiton |
14.7% |
5.1 |
**** |
|
Under Armour |
11.3% |
4.5 |
**** |
Source: CAPS as of Oct. 21.
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, why don't we start by taking a closer look at McDonald's.
The anatomy of a growth stock
If you're looking for the value in McDonald's, you don't have to look much further than the fact that the McDonald's brand was ranked the sixth-best global brand in Interbrand's 2009 survey. According to Interbrand's methodology, McDonald's brand is worth more than many iconic names such as Disney
But of course it's what's behind that brand name that's made McDonald's such a success. The company franchises and owns restaurants around the globe and has spent decades perfecting a business model that ensures that customers can enjoy a predictably fast and tasty meal no matter where they visit the golden arches.
There has been a lot of talk about the idea that Mickey D's has been cashing in on recessionary conditions as diners trade down from more traditional sit-down restaurants to its cheap eats. While this is no doubt true to some extent, the company actually derives a relatively small portion of total sales from its dollar menu, and has actually been focusing on improving all-around operations and offering compelling new products like the McCafe coffee assortment.
And with a dogged determination to return value to shareholders through share buybacks and dividends, investors can be sure that the company won't bogart the healthy cash flow that its business produces.
CAPS or bust
McDonald's stock has found itself falling just short of a perfect five-star CAPS rating, but four stars and nearly 4,200 outperform ratings still make it worth a hard look.
CAPS member SkepticalOx, who is ranked in the top 2% of all CAPS members, provided McDonald's stock a thumbs-up back in June, saying:
Great dividend (the company has increased dividend every year since it started paying). ... There's huge potential growth opportunities in emerging markets, as there's a growing middle class that needs quick food. KFC's outnumber McDonald's 3-to-1 in China for example (Chinese eat more chicken than beef), and this means there's room to grow with some of their chicken-products.
But here's the real question: What do you think of McDonald's prospects? Let the CAPS community know what you think by clicking over and sharing your opinions with the 140,000 investors already participating.
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