What are we looking for?
With markets tumbling on growing euro zone debt worries, it’s a good time to look for bargain-priced stocks.
We’ll use Validea Canada’s “Patient Investor” screen, which attempts to emulate the stock-picking methods of Warren Buffett. The screen is based on the book Buffettology, written by his former daughter-in-law, Mary Buffett.
The screen “is the only one of our strategies that is not taken directly from the writings of the guru himself, as Buffett has yet to write about his investment strategies” in detail, Validea says. We’ll use the screen to look for Canadian stocks.
More on the methodology
Mr. Buffett aims to buy solid businesses at “fair” prices and often holds stocks for decades, Coca-Cola and American Express being two examples. He summed up his investing philosophy in his 1996 letter to Berkshire shareholders: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.
“Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
The 11 stocks in the table are those that scored highest, as of May 23, based on the book’s interpretation of Mr. Buffett’s strategy. The “guru score” indicates what percentage of tests – each of which is weighted according to its importance – the stock passes.
Validea’s “long-term EPS growth” number is an average of the three-, four- and five-year annualized growth rates, to smooth out the effects of one exceptionally good or bad year.
The PEG ratio is the price-earnings number divided by the long-term earnings growth rate. Generally, the lower the PEG, the more attractive a stock is from a valuation standpoint.
A word to the wise
Remember that a stock screen is only a first step in the investing process, and that you should scrutinize companies on an individual basis. We’ll check back in a few months to see how the portfolio is faring.