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 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; it 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 have been 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 (max 5)
|
|
UnitedHealth Group (NYSE: UNH )
|
14.4%
|
1.5
|
*****
|
|
Halliburton (NYSE: HAL )
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23.3%
|
2.6
|
****
|
|
Costco Wholesale (Nasdaq: COST )
|
13.2%
|
2.2
|
****
|
|
ChinaMobile (NYSE: CHL )
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27.6%
|
3.1
|
*****
|
|
Noble (NYSE: NE )
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30.8%
|
1.4
|
*****
|
Source: Capital IQ, a division of Standard & Poor's, and CAPS as of May 13. 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, let's start by taking a closer look at Costco Wholesale.
The anatomy of a growth stock
Need a lot of something and need it cheap? Then Costco is the place for you. Offering everything from TVs, clothing, and fresh produce to auto tires, tobacco, and prescription drugs, Costco has the hookup for most of the items on your shopping list.
Costco is a membership-based warehouse club, and has become a retail powerhouse by being more efficient and scoring better deals for its customers than competitors. Though retail is a tough place to be during a recession, Costco may find more consumers turning to its massive stores as bargain hunting becomes more of a necessity.
To continue to deliver remarkable results for its shareholders, Costco will have to stay on top of its game. Not only does it have to lure consumers away from mega-retail chains like Target (NYSE: TGT ) and Wal-Mart (NYSE: WMT ) , it also has to go head-to-head with fellow warehouse club Sam's Club -- a Wal-Mart subsidiary.
CAPS or bust
Though Costco has yet to land a perfect five-star rating on CAPS, it still has a very solid following, with 2,931 CAPS members rating the stock an outperformer. CAPS All-Star tektan became one of those Costco bulls on Tuesday and related a recent shopping experience:
It's against my nature (cheap) to pay membership fees for the privilege of shopping anywhere. Was invited by a friend to join her on a trip to Costco. It was the first day of "coupon" week and also a Monday. The parking lot was packed. The store was mobbed, with people pushing carts piled high with products. The place was humming and all of the checkers were busy. Cars were lined up 3 deep to get to the gas pumps. Costco appeared to being doing 2 to 3 times the business of the adjacent big box stores. If this is business on a Monday the weekends must be a managers dream.
Now tektan's account should be taken with a grain of salt, since it is just one anecdotal piece of evidence. It also runs very contrary to what we heard from the retail sales report last week.
However, even as unemployment climbs and consumers find comfort in their savings accounts, a certain amount of shopping will still go on. And, as I mentioned above, I believe there will be many more consumers doing everything they can to find the best deals out there -- a hunt that may lead them straight to Costco's door.
But here's the real question: what do you think of Costco's prospects? Let the CAPS community know what you think by clicking over and sharing your opinion with the 130,000 investors already participating.
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