Undoubtedly, Warren Buffett is one of the greatest investors of all time. It's impossible to argue with the returns of his Berkshire Hathaway -- a 19.8% average annual increase in book value that spans back to the LBJ administration. During this time, the S&P 500 averaged less than half that average annual return.
Buffett exemplifies a disciplined investing approach from which we can all take notes. Let's see what the Oracle of Omaha craves when combing through the stock universe, and how his top holdings fit these criteria.
Top stock holdings
Over the past several years, Buffett has invested substantially in the following companies. Berkshire Hathaway owns anywhere from 4.5% to 13% of the companies listed below.
Total Cash per Share
Long-Term Debt to Equity vs. Industry Average
||$57.57||$23.16||3.17 vs. 5.17||26.6%|
||$74.20||$6.99||0.43 vs. 0.62||26.7%|
International Business Machines
||$201.57||$10.73||1.14 vs. 0.62||73.7%|
||$38.35||$1.17||0.66 vs. 0.69||9.9%|
||$33.06||$31.47||0.97 vs. 1.69||11.9%|
Sources: Yahoo! Finance, The Motley Fool.
Buffett loves a simple business that doesn't require a Ph.D. to understand. Coca-Cola and Kraft operate straightforward businesses; they make sugary water and snacks. We consume their products on a daily basis, and we easily understand these businesses. Wells Fargo, not so much. But of the big bank stocks, Wells has daintily tiptoed into speculative waters in comparison to its cannonballing peers.
Company executives and CEOs who focus on allocating capital and rewarding shareholders are favorites of Buffett. Take Kraft CEO Irene Rosenfeld. She's been at the helm since 2006 and spent nearly three decades rising through the ranks at Kraft and its subsidiaries. Her performance metrics are in complete alignment with shareholders, and I think she runs the business conservatively.
Healthy balance sheet
Buffett likes lots of cash and little or no debt on the books. Companies not saddled with debt more easily make acquisitions or buy back shares.
I took a look at the total cash per share for each of the five companies. Wells Fargo has a ton of cash, as does American Express, although balance-sheet cash for financial companies plays a different role than cash at most companies. Not surprisingly, the more capital-intensive businesses and those that have made recent acquisitions using cash possess less of it. Those companies include Coca-Cola, IBM, and Kraft.
All of the companies except for IBM possess less long-term debt-to-equity than their respective industry peers, solidifying strong positions within their industries for making acquisitions, increasing dividend payouts, or buying back shares.
Solid returns on equity
Buffett looks for companies that produce stellar returns on their investments. Return on equity is the amount of net income returned as a percentage of shareholder equity; it's a measure of profitability. Nearly all five companies possess double-digit returns on equity. IBM posts a whopping 73%, while American Express and Coca-Cola each display very strong ROEs of nearly 27%.
Share repurchases at the right time
Buffett applauds a company that repurchases shares when its stock is "selling at a discount to its intrinsic business value." These companies not only identify but take advantage of when their stocks are trading cheap.
All five companies bought back shares in the fourth quarter of 2011. Most notably, Wells Fargo bought back about 26.5 million shares at an average price of $26.45; today the stock trades at $32.53, representing an 18% profit on what Wells paid.
Also, American Express bought back more than 7 million shares in the fourth quarter of 2011 at an average price per share of $49.64. The stock trades just under $57 today, giving the company a 13% return on its buybacks.
If these stocks entice Buffett, they're surely good enough for you and me to consider. But do some Foolish research of your own, and watch to see if these stocks continue to exemplify Warren-worthy criteria or if they stray from that path.