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Billionaire financier and Berkshire Hathaway CEO Warren Buffett. (Carlos Barria/REUTERS)
Billionaire financier and Berkshire Hathaway CEO Warren Buffett. (Carlos Barria/REUTERS)

Number Cruncher

Strategy mixing best of Buffett and Lynch crushes benchmark Add to ...

What are we looking for?

Let’s get an update on a portfolio we created in January, 2012, combining the stock-picking strategies of Peter Lynch and Warren Buffett.

The screen

We used the “guru stock screener” from Validea Canada. (Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.) Specifically, we searched for Canadian stocks that met the criteria of both the “P/E Growth Investor” screen, which is based on Mr. Lynch’s strategy, and the “Patient Investor” screen, which emulates the stock-picking methods of Mr. Buffett. Our thinking was that, since both investors achieved excellent results on their own, combining their strategies would produce even better returns.

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The methodology

The P/E Growth Investor screen looks for stocks with a low PEG ratio, among other criteria. The PEG, which Mr. Lynch used when he was managing Fidelity’s Magellan Fund 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 a stock is from a valuation standpoint.

The Patient Investor screen chooses stocks with solid earnings growth and low price-to-earnings ratios, among other factors.

Nine Canadian stocks met both sets of criteria. We set up a hypothetical $90,000 portfolio with equal $10,000 investments in each of those nine stocks.

The results

From the inception date on Jan. 18, 2012, through Jan. 22, 2013, eight of the nine stocks rose, with most producing gains well into the double digits. Leading the pack was convenience store operator Alimentation Couche-Tard, up 60.3 per cent, followed by quick-service restaurant franchisor MTY Food Group, ahead 45.5 per cent.

Over all, the portfolio posted an advance of 22.8 per cent, excluding dividends. That crushed the S&P/TSX composite index, which advanced 4 per cent over the same period, also excluding dividends.

Remember that a stock screen is just a first step in the investing process. Be sure to research individual companies thoroughly before you invest.

Follow on Twitter: @johnheinzl

 

Validea Canada guru stock screen: Jan. 18, 2012 to Jan. 22, 2013

Company Symbol No. of shares/units Price $ (Jan. 22)
Alimentation Couche-Tard ATD.B-T 327.33 48.98
BMTC Group GBT.A-T 554.02 14.31
Bank of Nova Scotia BNS-T 190.26 58.4
Bird Construction Inc. BDT-T 769.23 15.07
Computer Modelling Group CMG-T 630.92 22.11
Home Capital Group HCG-T 195.73 60.8
MTY Food Group MTY-T 657.9 22.12
National Bank of Canada NA-T 135.23 79.24
Saputo Inc. SAP-T 252.14 50.5
Total C$ Stocks

Percentage changes from Jan. 18, 2012. Source: Globeinvestor.com, Validea.com

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