Warren Buffett believes in the U.S. economy - and he just spent $9-billion (U.S.) to prove it.
His acquisition this week of Lubrizol Corp. , an Ohio-based maker of industrial lubricants, reflects his bullishness on U.S. stocks, despite the country's current budget woes and high unemployment. "Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America," Mr. Buffett wrote in his annual letter to shareholders of Berkshire Hathaway Inc. "Yet our citizens now live an astonishing six times better than when I was born."
The billionaire's optimism came through in his discussion of the much-maligned U.S. housing market. He wrote that a housing recovery "will probably begin within a year or so." With that in mind, he says, Berkshire's businesses have made multiple housing-industry-related acquisitions in the past year, including the purchase of the leading manufacturer of brick in the state of Alabama.
Given Mr. Buffett's spate of acquisitions, I thought it would be a good time to look at some of the U.S.-based stocks that get high marks from my Buffett-inspired Guru Strategy. I've focused on stocks that are among Berkshire's biggest holdings or that have qualities Mr. Buffett praised in his letter. And, given that he is always open to looking outside the U.S. for values - he's made big investments in Chinese and Israeli firms in recent years - I've also included one of the top Canadian picks from my Buffett model onValidea.ca.
Coca-Cola Co. : Berkshire owned 200 million shares of this Atlanta-based beverage giant at the end of 2010 - almost 9 per cent of the company - and Mr. Buffett spoke highly of the long-time holding in his letter. He touted the firm's history of increasing its dividends, and said that within 10 years, "I wouldn't be surprised to see our share of Coke's annual earnings exceed 100 per cent of what we paid for the investment. Time is the friend of the wonderful business."
My Buffett-based model is also a big fan of Coca-Cola. This model looks deep into a company's history, targeting firms that have shown a persistent ability to increase earnings over the past decade. Coca-Cola fits the bill, having seen earnings per share increase in all but one year of the past decade.
Two more reasons the model likes Coca-Cola: The company has enough annual earnings ($11.9-billion U.S.) that it could pay off its $14-billion in debt in less than two years if it needed to, and it has averaged a 30.8-per-cent return on equity over the past decade, a sign of the "durable competitive advantage" Mr. Buffett is known to seek.
Aflac Inc. : Another Georgia-based company (its headquarters are in Columbus), Aflac insures more than 50 million people worldwide. It offers a wide array of medical, accident, disability and life insurance.
Mr. Buffett has spoken lately about his preference for investing in or owning insurers, saying that the "float" that insurance companies receive on the insurance premiums they hold essentially amounts to an interest-free loan. My Buffett-based model thinks Aflac is an insurance company Mr. Buffett could get behind. It has increased its earnings per share in eight of the past 10 years and has averaged a solid 16.4-per-cent return on equity over the past decade.
Varian Medical Systems Inc. : Mr. Buffett spent a chunk of his annual letter talking about debt, and the trouble it can cause. He compared credit to oxygen: "When either is abundant, its presence goes unnoticed. When either is missing, that's all that is noticed," he said.
Varian of Palo Alto, Calif., makes technologies that treat cancer and other conditions using radiotherapy, radiosurgery and proton therapy. It also makes X-ray equipment. And it boasts a balance sheet that is the picture of health. The firm has just $16.1-million in debt, compared to $380-million in annual earnings. Varian has also increased earnings per share in each of the past 10 years and averaged a 25.2-per-cent return on equity in that period.
BMTC Group is a holding company whose subsidiaries, Brault et Martineau Inc. and Ameublements Tanguay Inc., operate retail stores that sell furniture, household products, and electronic appliances. The Montreal-based firm is another low-debt company that gets high marks from my Validea Canada Buffett model. It has just $1-million in debt compared to $60.2-million in annual earnings, and has increased earnings per share in each year of the past decade. In addition, BMTC has averaged a return on equity of 31.4 per cent over the past 10 years, which my Buffett model loves.
Full disclosure: I'm long KO and AFL.
John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the Omega Consensus funds. Globe Investor has a joint venture with Validea.ca., a premium Canadian stock screen service.
Special to the Globe and Mail
John Reese