Berkshire Hathaway's
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 Buffett's superior investment performance, but also his investing style.
In addition to 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 decided that Warren Buffett is ... wait for it ... a large-cap growth investor.
The researchers' definition of growth 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: He only buys stocks that offer a discount to the company's intrinsic value. But this study does suggest 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 CAPS community members. (You can run the same screen by clicking here.)
|
Company |
Return on Equity (TTM) |
Book Value Multiple |
CAPS Rating
|
|---|---|---|---|
|
PotashCorp |
45.8% |
5.1 |
**** |
|
Procter & Gamble |
21.7% |
2.6 |
***** |
|
Chevron |
18.6% |
1.6 |
**** |
|
Costco |
11.7% |
2.6 |
**** |
|
Union Pacific |
13.7% |
2.0 |
**** |
Source: CAPS as of Sept. 16. TTM = trailing 12 months.
While these aren't meant to be formal recommendations, they're a great place to kick off more research. In fact, why don't we start by taking a closer look at Motley Fool Income Investor recommendation Procter & Gamble.
Anatomy of a growth stock
We don't have to wonder whether Procter & Gamble is on Buffett's radar. Berkshire Hathaway is the fourth-largest P&G shareholder, with a hefty $5.3 billion position in the stock.
So what makes this such a tasty stock market treat? To start with, the company has an incredible portfolio of strong and stable brands like Old Spice, Gillette, Tide, Pepto-Bismol, and Duracell -- just to name a few. And while investors and economists continue to fret about consumer spending, it seems unlikely that people will deny themselves purchases like Pepto-Bismol when the occasion calls for it.
P&G is certainly not the kind of company from which we can expect gangbusters growth. With revenue of nearly $80 billion and a market cap north of $160 billion, the company will clearly face headwinds from the law of large numbers as it tries to grow.
But P&G does have a pretty impressive track record of moving onward and upward. Over the past 10 years, it has delivered a compounded annual revenue growth rate of 7.5%, and has increased its net income margin from 9.9% to 17%.
Today, the company is continuing to dig up areas where it can find growth. Specifically, management has been focusing on building a solid presence across the consumer spectrum -- from value products all the way to more premium-priced items. At the same time, it's solidifying its footprint in growth economies like Brazil, Russia, and China.
CAPS or bust
P&G carries a perfect five-star rating on CAPS. Of the 6,414 ratings, 6,230 of them have come in on the bullish side.
CAPS member DanteSparda recently noted the company's strong brands and international exposure:
Undervalued. Solid buy with good line up of products both in the US and in numerous international markets. If you're looking for a relatively safe play with a nice dividend PG is for you.
But here's the real question: What do you think of P&G's prospects? Click over and share your opinion with the 140,000 investors already participating in CAPS.
Further CAPS Foolishness:
