Promising Growth: The Warren Buffett Way

Investment guru Warren Buffett used this fundamental criteria to achieve stunning returns over the decades

By David Braverman

This is the screen inspired by the book The Warren Buffett Way: Investment Strategies of the World's Greatest Investor by Robert Hagstrom. This screen is updated on a semiannual basis during the first week of February and August.

We started running this screen on February 13, 1995. For the remainder of 1995, the selected stocks rose 31.36% vs.27.88% for the S&P 500. In 1996, the screen stocks returned 42.21% vs. 20.26% for the S&P 500.

During 1997 the screen stocks rose 11.49% vs. 31.01% for the S&P 500. In 1998, the screen was up 18.12% vs. 26.67% for the S&P 500. In 1999, the screen gained 17.96% versus 19.53% for the S&P 500. In 2000, the screen climbed 23.2% vs. a drop of 10.1% for the S&P 500.

Overall, since inception, the screen stocks were up 255% vs. 174% for the S&P 500. All performance is before dividends and transaction costs. This time around, the screen picked 24 stocks.

We made a minor change in the screen criteria in August 1998. We previously took stocks with a return on equity above 20%. To avoid stocks that are having only a temporary surge in profitability, we now look for those stocks with a recent quarterly ROE above 15% and a ROE for each of the last 3 years of at least 15%.

To recap, the full criteria is now:

1. Owner Earnings (cash flow less capital expenditure above $20 million

2. Net margins above 15%

3. Return on equity above 15% for the most recent available quarter and the last thee years

4. $1 retained earnings generates at least $1 of additional market capitalization over the last five years

5. Valuation screen using forecasted cash flow five years out, discounted by the current 30-year treasury-bond rate

It should be noted that these are not necessarily stocks that Warren Buffett has bought or ever personally plans to buy. This screen only reflects criteria that Buffett has emphasized in the past.

These are the 24 stocks that emerged:

Americredit (ACF )

Biogen (BGEN )

Bristol Myers Squibb (BMY )

Brown & Brown (BRO )

Citrix Systems (CTXS )

Dionex (DNEX )

Franklin Resources (BEN )

Gannett (GCI )

Gentex (GNTX )

Ipalco (IPL )

John Nuveen (JNC )

Lee Enterprises (LEE )

Lincare Holdings (LNCR )

Linear Technology (LLTC )

Mackenzie Financial (MKFCF )

MGIC Investment (MTG )

Microsoft (MSFT )

Oracle (ORCL )

Orbotech (ORBK )

T Rowe Price (TROW )

SEI Investments (SEIC )

Tellabs (TLAB )

Verizon (VZ )

Watson Pharmaceuticals (WPI )

Braverman is a senior investment officer with Standard & Poor's

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