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 Nevada-Las Vegas, respectively. In 2008, the two completed what they call "the first rigorous examination of Berkshire Hathaway's investment performance" -- a paper analyzing not only Buffett's superior investment performance, but also his investing style.
Besides concluding that Buffett's superior returns since 1976 were more than just luck -- as if we didn't know that already -- Martin and Puthenpurackal concluded that Buffett is ... wait for it ... a large-cap growth investor.
The definition of growth 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, pegging 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 CAPS community members (you can run the same screen by clicking here).
|
Company |
TTM Return on Equity |
Book Value Multiple |
CAPS Rating (max 5) |
|---|---|---|---|
|
AT&T |
12.2% |
1.6 |
**** |
|
Vale |
27.8% |
1.7 |
***** |
|
PepsiCo |
35.1% |
6.4 |
***** |
|
Aflac |
16.2% |
1.7 |
**** |
|
3M |
32% |
3.7 |
***** |
Source: Capital IQ (a division of Standard & Poor's) and CAPS as of April 15. 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 Vale?
The anatomy of a growth stock
If you can see beyond the leviathan that is BHP Billiton
Acquisitions have helped Vale achieve this growth -- most notably the $19 billion acquisition of Canada's Inco -- but it has also invested a significant amount in producing organic growth. And the company expects to continue investing in growth.
The global financial crisis has put a dent in the mining industry: Slowing manufacturing, lack of available credit, and slumping confidence have led to big declines in demand and prices for the major metals. Though Vale is taking defensive steps such as shutting down higher-cost units and cutting administrative costs, management still sees this as a time to invest in growth. As others cut back their spending, Vale expects to use its strong balance sheet -- which sports nearly $13 billion in cash -- to make acquisitions and develop projects that will be ready for the next upswing.
CAPS or bust
There's no doubting where CAPS members stand on the prospects for Vale. They have rated the company's stock a perfect five stars, with 6,157 of the 6,292 views coming in on the bullish side.
BigDMan64 is one of CAPS' top members and has been bullish on Vale since the fall of 2007. When he provided that original thumbs-up, he said:
This is a basic metals play. My timing may be a little early as it has had significant upside and probably due for a correction. But there is a lot to like about this company...1) cheap ore locations, 2) reasonable P/E with opportunities for continued growth, 3) capacity for key acquistions and 4) great sector that I believe will be in a long term bull market regardless of housing slowdowns or economic uncertainties. There just is not enough scrap metal to meet world wide demand so new ore that can be mined at reasonable extraction costs offer an opportunity for increased long term profitability.
While the world seems a much different place today versus just two years ago, the primary points of BigDMan's pitch still hold true. In more recent bullish pitches, members have also noted the potential for mining companies to benefit from higher inflation as a result of government stimulus spending around the world.
But here's the real question: What do you think of Vale'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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