Everyone knows that Berkshire Hathaway's Warren Buffett is a value investor … right?
Don't tell Gerald Martin and John Puthenpurackal of American University and UNLV. In 2008, the two completed a paper that analyzed both Buffett's superior investment performance and his investing style. Besides concluding that Buffett's superior investment returns since 1976 were more than just luck -- big surprise! -- Martin and Puthenpurackal argued that Warren Buffett is... wait for it... a large-cap growth investor.
According to the researchers' definition of "growth," stocks with the highest book value-to-market-value ratios are value stocks, while those with the lowest such ratios are growth stocks. The paper concludes that growth stocks accounted for more than 40% of Berkshire's investments, while true value picks made up less than 20% of Buffett's buys.
Buffett is still very much a value investor by his own definition: He only buys stocks at a discount to their companies' intrinsic value. But if we're looking for Buffett-esque stocks, this study does suggest that we pursue high-quality companies, rather than rummaging through the dregs of the bargain bin.
To track down some stocks that might fit the bill, I've enlisted the help of our Motley Fool CAPS stock screener. I focused my search on stocks that are returning 10% or more on their equity, trading above book value, and highly rated by the CAPS community. (You can run the same screen, though its results may differ as the market changes.)
|
Company
|
TTM Return on Equity
|
Book Value Multiple
|
CAPS Rating (max 5)
|
|
Pfizer (NYSE: PFE )
|
12.5%
|
1.7
|
****
|
|
Intuitive Surgical (Nasdaq: ISRG )
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17.4%
|
4.7
|
****
|
|
Verizon (NYSE: VZ )
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14.0%
|
2.0
|
****
|
|
Chevron (NYSE: CVX )
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24.7%
|
1.5
|
****
|
|
Dynamic Materials (Nasdaq: BOOM )
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20.7%
|
1.9
|
*****
|
Source: Capital IQ, a division of Standard & Poor's, and CAPS as of May 27.
While these aren't meant to be formal recommendations, they're a great place to kick off some more research. Why don't we start with a closer look at Dynamic Materials?
The anatomy of a growth stock
When corrosive production environments collide with the need for cost savings, Motley Fool Hidden Gems pick Dynamic Materials may be the solution.
Companies like Dow Chemical (NYSE: DOW ) and Valero (NYSE: VLO ) create and process chemicals at high temperatures and pressures. Unfortunately, these conditions will eat up normal metals like John Madden on a Thanksgiving turkey. One solution is to build processing components entirely of durable metals like titanium or zirconium -- but that's expensive, not to mention overkill in most instances.
Dynamic Materials produces "explosion-welded clad metal plate." As the name (and the company's ticker symbol) suggests, Dynamic uses explosives to blast together a corrosive-resistant metal with a cheaper base metal. This creates a corrosion-resistant surface without the expense of equipment built entirely of that metal.
Dynamic Materials has been wildly successful -- sales grew more than 500% between 2003 and 2008 -- for a number of reasons. First off, the need for clad metals has been growing, particularly within the oil and gas industry. At the same time, Dynamic's explosion welding has significant advantages over other methods of cladding, and the company has developed expertise in large-scale production of explosion-welded metals.
CAPS or bust
Today's economic realities have weighed on Dynamic Materials' business. First-quarter sales and earnings both fell, as the company's backlog continued to slide downward. Members of the CAPS community, however, are looking past current results to examine the company's long-term potential.
Top-performing CAPS member tenmiles became a Dynamic Materials bull earlier this year, pitching: "Just a deep value play at $13.60; end markets are obviously weak, but niche player seems to discount most of the troubles at current valuation for investors with at least 3 year horizon."
More recently, CAPS All-Star kevinottofro also gave the stock a thumbs-up, calling out the stock's low valuation ratios and its five-star CAPS rating. While I don't see a near-term turnaround for the external pressures that Dynamic is facing, I happen to agree with both of these high-ranking CAPS members and have rated the stock an outperformer in my CAPS portfolio.
But here's the real question: What do you think of Dynamic Materials' prospects? Let the CAPS community know sharing your opinion with the 130,000 investors already participating.
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