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'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
|
Return on Equity (TTM)
|
Book Value Multiple
|
CAPS Rating
(out of 5)
|
|
Cisco (Nasdaq: CSCO )
|
15.9%
|
3.4
|
****
|
|
Caterpillar (NYSE: CAT )
|
15.6%
|
4.1
|
****
|
|
Southern Copper (NYSE: PCU )
|
12.1%
|
7.6
|
****
|
|
3M (NYSE: MMM )
|
22.7%
|
4.2
|
*****
|
|
Intuitive Surgical (Nasdaq: ISRG )
|
14.8%
|
6.8
|
****
|
Source: CAPS as of Nov. 4. 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, why don't we start by taking a closer look at Caterpillar.
Fueling the growth
As my fellow Fool Tim Hanson has pointed out, if you're looking for growth, China is the place to be. The country is an emerging powerhouse in the global economic arena and has a government that's been doing everything in its power to make sure the downturn doesn't derail the country's gravy train.
And of course while China may be the leader of the pack, we're also likely to see significant growth from a number of other emerging markets, including Brazil, India, Russia, Turkey, the Philippines, and Taiwan.
Global growth means a lot of things, including construction and increased demand for energy and other natural resources. That's reason for celebration for global contractors like Fluor, energy companies like Petrobras (NYSE: PBR ) , and miners like BHP Billiton (NYSE: BHP ) .
But in the midst of all of this, Caterpillar is humming the tune of the Jackson 5's I'll Be There and singing "Wherever there's a need for heavy machinery such as articulated trucks, backhoe loaders, and pipelayers ... I'll be there." (Don't worry, it sounds better set to music.)
The point is that to make all of this happen -- whether it's clearing forests, building industrial complexes, or mining raw materials -- there will be a global need for the kind of machinery that Caterpillar offers. While the company recognizes that global recovery isn't assured yet, it sees a good chance that the pep of emerging markets and a more general worldwide rebound will provide a dramatic boost to its business in coming years.
CAPS or bust
With all of this potential growth at Cat's doorstep, why would it still be just a four-star pick according to the CAPS community? A big part of the concern is valuation. Even if we believe the growth story for Caterpillar, paying 21 times expected 2010 earnings may seem a bit steep.
But even if the stock doesn't have a perfect five-star rating, the nearly 4,700 outperform ratings show that there is a lot of optimism. CAPS All-Star eztr1gger recently joined the bullish chorus and gave Cat an edge over one of its closest competitors:
Construction is already coming back and Cat has a hand in industrial markets with far reaching impact, unlike [Deere] with its base in consumer/farmer markets.
But here's the real question: What do you think of Caterpillar's prospects? Let the CAPS community know what you think by clicking over and sharing your opinion with the 140,000 investors already participating.
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