Is Silver Wheaton a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Silver Wheaton (NYSE: SLW  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Silver Wheaton meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Silver Wheaton's earnings and free cash flow history:

Source: S&P Capital IQ.

Silver Wheaton's earnings have soared over the past few years, which have been a boom time for the precious metals industry as prices have soared because of economic uncertainty.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

Silver Wheaton 3% 27% 11%
Silvercorp Metals (NYSE: SVM  ) 0% 22% 33%
Coeur d'Alene Mines (NYSE: CDE  ) 8% 4% 2%
First Majestic Silver (NYSE: AG  ) 5% 35% 2%

Source: S&P Capital IQ.

Many silver companies have been generating increasingly high returns on equity without having to employ hardly any debt.

3. Management
Co-founder Randy Smallwood has been CEO since last April. Before that, he was vice president of corporate development and has worked in mining for several years at Wheaton River Minerals and Goldcorp.

4. Business
Silver mining isn't particularly susceptible to technological disruption, though, naturally, it is subject to fluctuations in silver prices.

The Foolish conclusion
So is Silver Wheaton a Buffett stock? It's a mixed picture. Regardless of whether Buffett would ever buy Silver Wheaton, we've learned that the company has had growing earnings, operates in a technologically straightforward industry, and has produced moderately high returns on equity with limited debt. However, Buffett could be reluctant because of commodity cyclicality and its relatively new CEO. However, if you'd like to stay up to speed on Silver Wheaton's progress or that of any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn't own shares of any companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (7)

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 February 14, 2012, at 9:40 AM, peders01 wrote:

    I don't understand the methodology used in this article. Clearly the stock Buffet would buy is SVM, based on his stated criteria and the stats shown for SVM. Why ask about SLW ? Or at least included SVM in the basic text.

    On the other hand, the stats for the other two companies show them to have some problem data.

  • Report this Comment On February 15, 2012, at 5:41 PM, LEAFDRIVER wrote:

    I am tired of hearing only about GM and Tesla,

    I own the Nissan Leaf and I am extremely pleased with the car, its performance, range, etc...

    Please include the LEAF in future comparisons.

  • Report this Comment On February 15, 2012, at 5:55 PM, ryanalexanderson wrote:

    > Please include the LEAF in future comparisons.

    Yes, and I, too, am outraged that this article about SLW had nothing about the latest trends in waste management and stock tick symbol WM. Ilan, please look at the "real story" next time.

  • Report this Comment On February 20, 2012, at 12:44 AM, rfaramir wrote:

    "Many silver companies have been generating increasingly high returns on equity without having to employ hardly any debt."

    SLW is actually on the other side of this coin. Many companies pledge future silver output to SLW in return for cash (from SLW) with which to invest in mining capacity. It's essentially a debt payable in kind, since it is paid in silver. Does this show up as any kind of debt for these companies?

  • Report this Comment On February 28, 2012, at 11:52 AM, TMFDiogenes wrote:

    Hey rfaramir,

    That's an interesting point. I don't believe it shows up as debt on the balance sheet. An interesting tangent -- it's been argued that one of the reasons for the explosion in the use of certain types of derivatives over the past decade or two (I'm not talking about the particular companies mentioned here) has been to improve debt ratios and jump other creditors in line in case of a bankruptcy.

    Thanks,

    Ilan

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