By David Braverman Well, even a legendary investor can have an off year or two. That has been the case for Warren Buffett, as the stock of his company, Berkshire Hathaway (BRK.A) underperformed the broader market in 2004, rising 4.3%, vs. 9% for the large-cap Standard & Poor's 500 index. The stock was something of a laggard in 2003 as well, posting a respectable increase of 16%, vs. the benchmark index's surge of 26%.
Of course, a soft patch of one or even two years must be placed in the context of the overall results of Buffett's remarkable career. During the last few decades, he has parlayed some well-chosen core holdings into an unparalleled performance record -- not to mention an enormous personal fortune (see BW Online, 2/3/05, "Thinking Like Warren Buffett").
BOOK VALUE. Berkshire's book value per share has grown at a compounded annual rate of more than 20% over the last 38 calendar years. If you had invested $10,000 in Berkshire in January, 1968 (the shares closed at $20.50 on the last trading day of that month), your holding would be worth more than $44 million today.
Buffett has prospered by buying quality stocks with good earnings power and hanging on through bull and bear markets. Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best-seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor.
With Hagstrom's book as a source, we at S&P have put together a stock screen that picks companies using criteria similar to those that fit the legendary investor's growth-oriented style. S&P updates this screen on a semiannual basis, during February and again in August.
SOLID RETURNS. Over the years, the screen has put in a pretty good performance itself. In each of the past three years, the portfolio has outperformed the S&P 500 by 9.1% in 2002, 4.6% in 2003, and a whopping 13.4% in 2004.
Since its inception on Feb. 13, 1995, through Dec. 31, 2004, it had an average annual return of 17.8%, compared to 9.8% for the S&P 500. (All performance figures are before dividends and transaction costs.)
Here's how the screen portfolio has stacked up against the S&P since inception:
Screen Perf. (% chg.)
S&P 500 Perf. (% chg.)
*From inception Feb. 13.
Many of the stocks from the previous update of the portfolio in August, 2004, also appear in this edition. The screen continues to harbor quite a few health-care and financial shares, as companies in these sectors typically feature high margins and high return on equity -- key criteria for Buffett. Once again, a sprinkling of technology and energy concerns made the list as well.
Here's our disclaimer. It should be noted that these are not necessarily stocks that Buffett has bought or ever personally plans to buy. The list reflects only the criteria that Buffett has emphasized in the past.
The full criteria for this screen:
1. Owner earnings (
cash flow less
capital expenditures) above $20 million
Net margins of at least 15% for the trailing 12 months
Return on equity of at least 15% the previous quarter and in every year for the last three years
Retained earnings that have grown less than the
market capitalization, on an absolute basis, in the last five years
5. Looking five years into the future, projected cash flow per share greater than the current market price for each stock (discounted to the present using the 30-year Treasury yield)
6. Market capitalization of $500 million or more
The current version of the screen lists 44 names:
S&P Promising Growth Portfolio -- February, 2005
Adobe Systems Inc.
Brown & Brown
China Mobile Hong Kong
Cognizant Tech Solutions
Factset Research Systems
Intl. Game Technology
Johnson & Johnson
New Century Financial
T. Rowe Price Group
Waddell & Reed
Braverman is vice-president for Standard & Poor's Portfolio Advisors
Numer de Guia, CFA, analyst for Standard & Poor's Portfolio Advisors, contributed to this article