What are we looking for?
Warren Buffett and Peter Lynch are two of the most celebrated investors, each with a track record of market-beating returns that has elevated them to legend status. What if we could somehow combine their two brains into one?
Number Cruncher doesn’t have the stem-cell technology to pull off this biological feat in the flesh, but we do have access to a stock screener that can simulate what a Warren Lynch (or is it Peter Buffett?) portfolio might look like.
We’ll use the guru stock screener from Validea Canada. (Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.) Specifically, we’ll search for stocks that meet the criteria of both the “P/E Growth Investor” screen, which is based on Mr. Lynch’s strategy, and the “Patient Investor” screen, which seeks to emulate the stock-picking methods of Mr. Buffett.
The P/E Growth Investor screen uses the PEG ratio, among other factors. This measure, which Mr. Lynch used when he was piloting Fidelity’s Magellan Fund to superior returns until his retirement in 1990, takes the P/E ratio and divides it by the earnings growth rate. Generally, the lower the PEG, the more attractive the stock is from a valuation standpoint.
Mr. Buffett looks for stocks with solid earnings growth and low price-to-earnings ratios, among other criteria.
He summed up his investing philosophy in his 1996 letter to Berkshire Hathaway 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.”
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.
We’ve set up a hypothetical $90,000 portfolio with equal $10,000 investments in each of the nine stocks. We’ll check back every few months to see how it’s faring.
Remember that a stock screen is just a first step in the investing process. Be sure to research individual companies thoroughly before you invest.