Warren Buffett Is a Growth Investor

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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 Buffett's superior investment performance and 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 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	Return on Equity (TTM)	Book Value Multiple	CAPS Rating (out of 5)
Halliburton (NYSE: HAL)	18.9%	3.3	****
Southern Co. (NYSE: SO)	10.5%	1.7	****
Royal Bank of Canada (NYSE: RY)	11.2%	2.7	****
Precision Castparts (NYSE: PCP)	17.3%	2.7	*****
Nike (NYSE: NKE)	16.4%	3.4	****

Source: CAPS as of Nov. 19. 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 Royal Bank of Canada.

What would Warren do?
Warren Buffett and banking are sort of like peanut butter and banana -- not the first combo you'd think of (insurance is more the jelly to Warren's peanut butter), but a solid duo nonetheless. Currently, Wells Fargo (NYSE: WFC) is Berkshire's second-largest holding, and the company also owns big chunks of banks like US Bancorp and M&T Bank.

Despite the fact that Buffett made a significant investment in investment banking powerhouse Goldman Sachs (NYSE: GS) last year, he'd probably agree when I say that the best banks are typically the most boring. While slinging MBSes, CDOs, CDSes, and any number of other acronyms can add some gusto to the bottom line, we've also seen how they can topple even seemingly powerful financial companies.

Royal Bank of Canada is far from perfect; it does significant business in risky areas like credit default swaps, and it has a notably high assets-to-equity ratio of 19-to-1. However, the majority of its income comes from good old-fashioned banking and tried-and-true financial services such as wealth management and insurance. In fact, management specifically targets its capital markets and investment banking business to account for only 25% of the bank's total business.  

Better still, the company derives most of its income from its home base of Canada, which has looked more like Switzerland lately when compared to the U.S. banking nightmare. Heck, if we consider the mess at UBS, Canada may look more like Switzerland than Switzerland -- except maybe for the tax-evading secrecy part.

CAPS or bust
RBC's four-star rating puts it among the top banking picks in CAPS. All-Star PearlandTX became one of the RBC bulls over the summer, giving the bank the nod thanks in large part to good customer experiences:

I have been a Royal Bank of Canada customer since about 1991. I have recently closed all of my other bank accounts because RBC has proven to be the most reliable, fair, and consistent financial institution I have ever worked with. Plus, they are one of the few that was managed sensibly BEFORE the mortgage meltdown and was not damaged by irrational behavior.

But here's the real question: What do you think of RBC's prospects? Let the CAPS community know by clicking over and sharing your opinion with the 140,000 investors already participating.

Although RBC offers a pretty tasty 3.4% yield, fellow Fool and dividend-lover Adam Wiederman has dug up the best yields for the next 10 years.