Master investor Warren Buffett's track record inspires envy: 40-plus years of greater-than-20% annualized returns. That performance helped him build a more-than-$60 billion fortune -- among the largest in the world -- while doing something he loves.
Buffett's history of outperformance explains why so many investors have paid attention to his recent investments in General Electric (NYSE:GE) and Goldman Sachs (NYSE:GS), not to mention the editorial he wrote in The New York Times declaring that now is a good time to buy stocks.
While you may not be able to precisely replicate his success, you can try to invest like Buffett … which is the next best thing.
The blueprint
Of course, Buffett has historically tried to keep his methods and ideas under wraps. But page 25 of the 2006 Berkshire Hathaway annual report reveals a Willy Wonka-like glimpse into the inner workings of his empire. That's because Berkshire needs your help.
See, as the company's cash hoard grows, Buffett needs to add bigger and bigger businesses to the portfolio in order to keep returns high. But businesses that meet Buffett's high standards are difficult to find, so he's asked his shareholders to keep their eyes peeled. Buffett wrote that he's eager to hear from any firm that meets the following five criteria:
- At least $75 million in pre-tax earnings.
- Demonstration of consistent earnings power.
- Good returns on equity (ROE) while employing little or no debt.
- Management in place.
- Simplicity ("if there's lots of technology, we won't understand it").
A master list for the master
Now, Buffett, for his part, is looking for private businesses he can buy whole-hog. But because none of us is likely to make a multibillion-dollar acquisition anytime soon, here are five publicly traded names that pass Buffett's sniff test:
|
Company |
Industry |
EBT* |
5-Year EPS Growth |
ROE |
Long-Term Debt (mm) |
Insider Ownership |
|---|---|---|---|---|---|---|
|
Apollo Group (NASDAQ:APOL) |
Education Services |
$563 |
12% |
46% |
$0 |
21% |
|
eBay (NASDAQ:EBAY) |
Internet Services |
$2,382 |
37% |
18% |
$0 |
16% |
|
Fossil (NASDAQ:FOSL) |
Apparel |
$210 |
19% |
19% |
$4 |
34% |
|
II-VI (NASDAQ:IIVI) |
Electrical Equipment |
$95 |
41% |
27% |
$4 |
16% |
|
Stryker |
Health-Care Equipment |
$1,584 |
21% |
21% |
$0 |
28% |
*Earnings before taxes, in millions. Data from Capital IQ, a division of Standard & Poor's.
While these are all promising businesses, the story doesn't end here. That's because Buffett also named a sixth criterion: an offering price.
Price may be the most important criterion of all. If you know anything about Buffett, you know that he made his fortune not simply by buying great companies, but by buying great companies at great prices.
Pay for greatness
So what would Buffett pay for these five stocks? It's hard to say, but what we know for sure -- thanks to that aforementioned Times editorial -- is that Buffett believes stocks are cheap. That said, I'm sure all five of these stocks are on the radars of Fool co-founders David and Tom Gardner in their Motley Fool Stock Advisor investing service.
And that's not surprising. Like Buffett, David and Tom look to buy shares of great companies at great prices. If you'd like to look at the stocks David and Tom are recommending today, join Stock Advisor free for 30 days. There's no obligation to subscribe.
This article was first published May 7, 2007. It has been updated.
Tim Hanson owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Stryker. Berkshire Hathaway and eBay are Stock Advisor picks. Berkshire is also an Inside Value recommendation. Fossil is a Motley Fool Hidden Gems selection. Like Rudy, the Fool's disclosure policy can't fail.
