What are we looking for?
Warren Buffett made headlines on Thursday when his Berkshire Hathaway invested $5-billion (U.S.) in Bank of America.
That got us thinking: If the Oracle of Omaha were to invest in Canada, which companies would he choose? Today we’ve got a screen that will try to answer that question.
Validea Canada’s “Patient Investor” screen attempts to emulate the stock-picking methods of Mr. Buffett. It’s 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.
Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.
The Buffett 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 10 stocks in the table are those that scored highest, as of Aug. 24, based on the book's interpretation of Mr. Buffett's strategy. You'll notice that all but one of the price-to-earnings ratios are less than 20, which is consistent with Mr. Buffett's desire not to overpay for a stock.
Also, all but one of the stocks has shown positive earnings growth over the past five years. (Validea's “long-term EPS growth” number is actually 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 of caution
Remember that a stock screen is only a first step in the investing process, and that you should scrutinize companies on an individual basis. For example, one company on the list, Sino-Forest, is fighting allegations of fraud. So be sure to do your own due diligence before investing.
We’ll check back in a few months to see how the portfolio is faring.