Berkshire Hathaway's
Well, don't tell that to Gerald Martin and John Puthenpurackal of American University and UNLV. Earlier this year the two completed what they call "the first rigorous examination of Berkshire Hathaway’s investment performance" -- a paper that analyzed not only 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; 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 -- 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 some 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 (you can run the same screen by clicking here).
|
Company |
TTM Return on Equity |
Book Value Multiple |
CAPS Rating (max 5) |
|---|---|---|---|
|
Transocean |
28.9% |
1.1 |
***** |
|
Cisco |
21.5% |
2.3 |
**** |
|
Intuitive Surgical |
19% |
2.7 |
**** |
|
Corning |
45.8% |
1.1 |
***** |
|
Caterpillar |
47.5% |
2.2 |
**** |
Source: Capital IQ, a division of Standard & Poor's, and CAPS as of March 4.
While these aren't meant to be formal recommendations, they're a great place to kick off some more research. In fact, why don't we start by taking a closer look at Cisco.
The anatomy of a growth stock
When President Obama addressed the nation last week, he said we need to make sure our financial markets are rewarding "drive and innovation" and punishing "short-cuts and abuse." How should we interpret this? The abuses seem pretty obvious -- companies like Citigroup
As for that "drive and innovation," well, I'd wager that the president was referring to companies just like Cisco. He's looking for companies that are hard at work tinkering in their labs to create new products that will make workers more productive and help drive new economic growth. One of the original innovators in the area of routers, today Cisco is a behemoth in the networking world, developing and selling routers, switches, video conferencing equipment, security products, wireless networking gear, and a host of other networking products.
Business for Cisco is understandably slow right now, as companies around the world try to slash their budgets to keep afloat during the recession, but it has more than enough financial strength to ride out the rough tide. As of its most recent balance sheet, the company had darn near $30 billion in cash and investments, against roughly $7 billion in debt. And while profit for its most recent quarter fell 27%, it doesn't take much of a leap of faith to assume that businesses of all types will be back to gearing up with Cisco products once the recession has run its course.
CAPS member paggles recently become one of the nearly 8,000 Cisco bulls on CAPS and highlighted the networking specialist's industry dominance and low stock valuation:
Cisco sets the standrad in fiber optics communication. 10 years ago it was priced at 60 times earnings and now has a p/e of less than 13. It is positioned well with lots of cash for this cash-strapped economy. It is a growth tech company with no dividend because it will continue to outpace its competitors and become a dominant player in the new economic world order.
CAPS or bust
But here's the real question: What do you think of Cisco's prospects? Let the CAPS community know what you think by clicking over and sharing your opinion with the 125,000 investors already participating.
Further CAPS Foolishness:
