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, classifying value stocks as those with the highest book-to-market ratio and 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 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. (To get full results, run the same screen by clicking here.)
|
Company |
TTM Return on Equity |
Book Value Multiple |
CAPS Rating
|
|---|---|---|---|
|
Johnson & Johnson |
27.5% |
3.6 |
***** |
|
Vale |
26.3% |
2.0 |
***** |
|
AT&T |
12.3% |
1.5 |
**** |
|
American Oriental Bioengineering |
12.4% |
1.1 |
***** |
|
American Eagle Outfitters |
11.0% |
1.9 |
**** |
Source: CAPS as of Sept. 2. TTM = trailing 12 months.
While these aren't meant to be formal recommendations, they're a great place to kick off more research. Why don't we start by taking a closer look at Vale?
The anatomy of a growth stock
The near-term picture for Vale is a bit cloudy. But that shouldn't take anyone by surprise; the near-term outlook for pretty much any business is a bit touch-and-go right now.
However, industrial production and manufacturing have been picking up recently, and the company has put some idled production back online thanks to demand from Japan, China, and Europe. In addition, Vale has put cost-control initiatives in place to boost profitability while times are tough.
It's the longer-term outlook, though, that makes Vale such an attractive company. As the world's largest iron exporter, it's taking full advantage of the growth and infrastructure build-out in China. The growing use of stainless steel (which often includes nickel), as well as the use of nickel for electric car batteries, has implications for Vale's significant nickel business. The company has also noted that new production of metals like copper faces challenges, which is good news for folks like Vale that are already sitting on reserves.
CAPS or bust
Vale has received a perfect five-star rating on CAPS thanks to nearly 6,300 outperform ratings. CAPS members have highlighted a variety of reasons for liking the stock, including bullishness on China and metals in general and concern about inflation.
CAPS All-Star alvinbentley gave Vale the nod as an outperformer back in April 2008, with an eye toward the company's connection to China and that country's torrid growth:
Vale controls half of the world's iron ore and can command higher prices with increasing demand. For reasons that are not totally clear to me, China is willing to pay higher shipping costs to obtain Brazilian iron ore rather than importing from Australia ([BHP
(NYSE:BHP) ] and [Rio Tinto(NYSE:RTP) ]). As China is the world's leading steel producer, this relationship will maintain an ever increasing flow of money from China to Brazil.
But here's the real question: What do you think of Vale's prospects? Let the 140,000-member CAPS community know what you think by sharing your opinion.
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