The Warren Buffett Experiment

Berkshire Hathaway's (NYSE: BRK-B) iconic head honcho, Warren Buffett, has said that if he were managing a smaller sum of money, he could be notching 50% annual returns.

How? It might not surprise you that his approach is neither the norm nor quick and easy. In an early '90s interview, Buffett suggested that an investor looking for these kinds of returns should do exactly what he did when he ran his private investment partnership: Learn about every publicly traded company in the United States.

When the interviewer protested that there were 27,000 public companies, Buffett replied, "Well, start with the A's."

Though it may sound too ludicrous to actually work, I've decided to take up Buffett's challenge. The only slight tweak I've made is that I've randomized the entire list of 12,638 companies listed on U.S. exchanges with a market cap above $1 million. So I won't technically hit every company, nor will I be actually be starting with the A's.

Ready? Here are the first three from the list.

Company:

Daiichi Sankyo Co.

Industry:

Health care

Comparable Companies:

Johnson & Johnson (NYSE: JNJ  ) , Merck (NYSE: MRK  )

Market Cap:

$14 billion

Price-to-Earnings Ratio:

10.4

CAPS Rating:

N/A

Source: CAPS and Capital IQ, a Standard & Poor's company.

Daiichi Sankyo is a Japanese pharmaceutical company with its eyes on the U.S. market, and big goals for the next few years. The company develops and markets both prescription and over-the-counter medications, and sells them in a number of major global markets, including Japan, North America, Europe, and India.

The company was founded as Sankyo Shoten in 1899; it's been operating as Daiichi Sankyo since 2005, when Sankyo combined with Daiichi Pharmaceutical. Growth for the company has been anemic at best over the past few years, and a big goodwill writedown led to a fiscal 2009 loss. However, management has set some impressive targets. Among the goals for "Vision 2015," it aims to increase revenue to 1.5 trillion yen (a 60% boost from calendar 2009) and nearly triple operating margins to 25%.

Management's goals seem a bit audacious, but at least they're aiming high. Between management's bullish targets, the stock's current valuation, and a decent dividend payout, this company seems worth a further look.

Company:

Banesto Banco Espanol de Credito

Industry:

Financial

Comparable Companies:

Wells Fargo (NYSE: WFC  ) , HSBC Holdings (NYSE: HBC  )

Market Cap:

$6.6 billion

Price-to-Earnings Ratio:

9.0

CAPS Rating:

N/A

Source: CAPS and Capital IQ, a Standard & Poor's company.

My initial impulse when confronted not only with a bank, but a bank from Spain (which has struggled more than most European economies) was to give it a quick "pass" and move on. However, a closer look makes me want to dog-ear this one along with Daiichi Sankyo.

Banesto's 2009 annual report pays a lot of lip service to risk management, as many banks do these days. But it appears that Banesto may actually deliver on that promise. When Global Finance released its list of the world's safest banks in 2009, Banesto came in at 25, well ahead of the first U.S. bank on the list (The Bank of New York Mellon at No. 32).

Though Banesto's results have taken a hit during the global recession, it hasn't experienced the same kind of massive losses as other major banks. Its financial leverage may be a bit high for my taste, but its valuation looks pretty reasonable, and it appears capable of continuing to pay its dividend. As far as banks go, this could be one to watch.

Company:

K-Swiss (Nasdaq: KSWS  )

Industry:

Consumer Discretionary

Comparable Companies:

Nike (NYSE: NKE  ) , Deckers Outdoor

Market Cap:

$328 million

Price-to-Earnings Ratio:

NM

CAPS Rating:

***

Source: CAPS and Capital IQ, a Standard & Poor's company.

K-Swiss basically has one thing going for it -- cash. At the end of 2009, the company had roughly $4.90 in cash per share. That's not too shabby, when you consider the stock price is $9.34.

While this might be the kind of situation that reels in some investors, I'm not enticed to bite. If the stock's price dropped to extreme levels -- say, below net current assets -- that'd be one thing. But the company has recently been losing money and burning cash, and it's expected to continue bleeding red ink. Management's decision to suspend the dividend indefinitely suggests that it may agree with Wall Street.

K-Swiss gets a solid "pass."

This gets us started, but we still have 12,635 companies to go. Be sure to stay tuned for the next installment.

Want a shortcut to this long, tedious process? Dan Caplinger believes he's found five dividend stocks that will serve you well for the next 50 years.

Berkshire Hathaway is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. Johnson & Johnson is a Motley Fool Income Investor selection. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Johnson & Johnson, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy thinks it isn't surprising that Matt has no life.


Read/Post Comments (7) | Recommend This Article (23)

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.

  • Report this Comment On March 01, 2010, at 3:19 PM, TMFMileHigh wrote:

    Nice work, Matt.

    Honestly, in reading that headline, I had visions of slurping down Cherry Coke and eating cheeseburgers with an otherwise healthy diet of financial reports. Guess its lunchtime. (Grins.)

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 01, 2010, at 5:58 PM, TMFKopp wrote:

    Haha! Thanks Tim. Maybe as I continue to work through those 12,000 companies I should do it with a Cherry Coke in hand...

    Matt

  • Report this Comment On March 01, 2010, at 6:39 PM, libragopi wrote:

    Ah, finally a project that would talk about all the rest of the stocks out there. We'll see how far Matt can keep his promise of covering 10000+ stocks. It might take years, well, if we could match Buffett's returns, then why not?

  • Report this Comment On March 01, 2010, at 11:41 PM, HarryCarysGhost wrote:

    This is clearly crazy :)

  • Report this Comment On March 02, 2010, at 7:19 AM, sogastocks wrote:

    Lately, I have read often that Buffett cannot pick up good deals like he used to because he has too much money.

    I wouldn't mind having his problem.

    http://hot-penny-stocks.blogspot.com/2010/02/top-stocks-to-b...

  • Report this Comment On March 02, 2010, at 7:19 AM, sogastocks wrote:

    Lately, I have read often that Buffett cannot pick up good deals like he used to because he has too much money.

    I wouldn't mind having his problem.

    http://hot-penny-stocks.blogspot.com/2010/02/top-stocks-to-b...

  • Report this Comment On April 08, 2010, at 1:40 AM, flabanker wrote:

    Matt, Why on earth would you pick those two international companies to recommend? Aren't there enough companies in the USA from which to select? I couldn't even find info on the Spanish Bank on Yahoo. And your other to recommendations are way off already. The one you like has dropped from $20.05 to $18.40. And the one you passed on at $9.34 has risen to $12.14. A swing and a miss with K-Swiss. Does the Fool keep track of your record. If you would have watched Cramer you would have known the footwear market is on fire. Also, I checked out you CAP Portfolio and you have correctly guessed on 73 of your last 165 picks. 9 wrong out of every 16 is not a good record yet your Cap score is 97? I sure don't get your scoring system. I now know how to get to 50% return, short your picks and pick your passes.

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