Back in December, Fool alum Emil Lee revealed Warren Buffett's magic number. After a lengthy study of Buffett's past purchases, Lee concluded that the Oracle's preferred purchase price is around 12.5 times trailing earnings.
What's so special about 12.5? If you take the inverse of that price-to-earnings (P/E) ratio, you get an earnings-to-price ratio -- otherwise known as an earnings yield -- of 8%. This earnings yield is directly comparable to the yield on a bond or any other fixed income security. If you're buying an indestructible company that throws off monster free cash flows, an 8% yield is a fairly low-risk/high-return proposition, especially given the potential growth kicker on top of that basic yield.
After the recent market rout, there are a whole lot of companies trading in this sweet spot. I decided to run a CAPS screen of stocks sporting the following:
- Market capitalization north of $10 billion
- Trailing P/E ratio between 8 and 14 times earnings
- Return on equity of at least 20%
- CAPS rating of four or five stars
Here are 7 stocks the magic number screen spit back at me:
|
Company |
P/E Ratio |
Earnings yield |
Return on Equity (TTM) |
CAPS Rating |
|---|---|---|---|---|
|
3M |
10.4 |
9.6% |
29.9% |
***** |
|
Canadian National Railway |
9.6 |
10.4% |
20.9% |
***** |
|
Diageo |
11.7 |
8.5% |
42.4% |
***** |
|
DuPont |
9.1 |
11% |
26.4% |
***** |
|
Merck |
11.5 |
8.7% |
24.5% |
**** |
|
Target |
11.1 |
9% |
20.4% |
**** |
|
United Technologies |
10.3 |
9.7% |
20.7% |
**** |
Source: Motley Fool CAPS screener and author's calculation (for yield). TTM = trailing 12 months.
That is quite a lineup. If you bought this group, went to the beach, and came back in a year, I think you'd be pleased with the results. You'd also have a tan to rival Angelo Mozilo's.
It's no wonder Buffett's been acting like a kid in a candy store lately. There are some amazing values out there today. I, for one, nibbled at some shares today, and I'll tell you more when Fool disclosure rules permit me to do so. So what are you buying?
In the coming weeks, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. The service, which just launched, will rely heavily on proprietary CAPS "community intelligence" data to establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.
