Warren Buffet at the premiere of ‘The Post’ in Washington DC.Dennis Van Tine/AP
Warren Buffett is the most famous value investor around.
His approach requires investors to look past the news and instead focus on the fundamentals of a company when deciding where to put their money. Simply put, value investing is the practice of investing in a company that is trading at less than its intrinsic worth and then holding onto shares until the price catches up, under the belief all companies will eventually be fairly valued.
In his 2014 letter to shareholders, Buffett laid out six criteria he applied to measure a company’s fundamentals. He said he was normally interested in big companies with at least $75 million of pretax earnings; companies that could demonstrate consistent earning power and were not in need of a turnaround; companies that earned good returns on equity while using little or no debt; companies with strong management already in place; companies with simple business models, rather than those with lots of technologies that are hard to understand; and companies offer clear asking price to be acquired.
While most people don’t have the wealth to acquire a whole company, they can still consider Buffett’s suggestions when investing in equity markets by buying stocks that are being undervalued by the market.
Inspired by Buffett, Well Fargo analyst Colleen Hansen listed seven indicators and filtered nine stocks whose fundamentals may look attractive to Buffett.
Here are the seven indicators:
- Five-year average return on equity (ROE) greater than 15%;
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Five-year average return on invested capital (ROIC) greater than 15%;
- Debt-to-equity (D/E) less than or equal to 80% of the industry average;
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Five-year average pretax profit margin (PM) 20% higher than the industry average;
- Current price-to-earning ratios(P/E) below ten-year historical and industry average P/E ratios(by consensus);
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Current price-to-book value multiples(P/B) below historical and industry multiples;
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Current price-to-cash flow (P/CF) ratios below the industry average
And here are nine companies that Hansen thinks Buffett could target:
Altria
Ticker: (MO)
Sector: Tobacco
5-Year Average ROE: 139.8%
5-Year Average ROIC: 37.6%
D/E versus Industry D/E: 82.5% vs. 184.4%
5-year average pretax PM versus 5-year average industry PM: 57.8% vs. 30%
Current P/E versus Industry P/E: 15 vs. 18.5
Current P/B versus Industry P/B: 7.2 vs. 9.6
Current P/CF versus Industry P/CF: 16.7 vs. 21.7
Market Cap: $113.22 billion
Source: Wells Fargo
Micron Technology
Ticker: (MU)
Sector: Technology
5-Year Average ROE: 28.4%
5-Year Average ROIC: 19%
D/E versus Industry D/E: 11.7% vs. 43.9%
5-year average pretax PM versus 5-year average industry PM: 15.1% vs. 9.6%
Current P/E versus Industry P/E: 4.0 vs. 22.2
Current P/B versus Industry P/B: 1.5 vs. 4.6
Current P/CF versus Industry P/CF: 2.8 vs. 18.2
Market Cap: $49.26 billion
Source: Wells Fargo
EQT Midstream Partners
Ticker: (EQM)
Sector: Energy
5-Year Average ROE: 29.4%
5-Year Average ROIC: 18.5%
D/E versus Industry D/E: 139.4% vs. 216.6%
5-year average pretax PM versus 5-year average industry PM: 66.4% vs. 23.8%
Current P/E versus Industry P/E: 10.4 vs. 18.1
Current P/B versus Industry P/B: 1.8 vs. 3.1
Current P/CF versus Industry P/CF: 5.4 vs. 7.9
Market Cap: $6.2 billion
Source: Wells Fargo
Franklin Resources
Ticker: (BEN)
Sector: Financials
5-Year Average ROE: 18%
5-Year Average ROIC: 15%
D/E versus Industry D/E: 7.4% vs. 164.2%
5-year average pretax PM versus 5-year average industry PM: 38.8% vs. 31.1%
Current P/E versus Industry P/E: 9.1 vs. 12.2
Current P/B versus Industry P/B: 1.5 vs. 3.4
Current P/CF versus Industry P/CF: 9.2 vs. 12.1
Market Cap: $15.04 billion
Source: Wells Fargo
Michael Kors Holdings
5-Year Average ROE: 38.6%
5-Year Average ROIC: 37%
D/E versus Industry D/E: 27.2% vs. 61.2%
5-year average pretax PM versus 5-year average industry PM: 23% vs. 10.2%
Current P/E versus Industry P/E: 12.6 vs. 18.6
Current P/B versus Industry P/B: 4.7 vs. 4.3
Current P/CF versus Industry P/CF: 8.9 vs. 14.7
Market Cap: $9.50 billion
Source: Wells Fargo
Regeneron Pharmaceuticals
Ticker: (REGN)
Sector: Pharmaceuticals
5-Year Average ROE: 21.5%
5-Year Average ROIC: 18.3%
D/E versus Industry D/E: 9.8% vs. 57.1%
5-year average pretax PM versus 5-year average industry PM: 30.8% vs. 19.7%
Current P/E versus Industry P/E: 18.9 vs. 25.3
Current P/B versus Industry P/B: 5.8 vs. 6.2
Current P/CF versus Industry P/CF: 20.7 vs. 26.8
Market Cap: $40.78 billion
Source: Wells Fargo
Urban Outfitters
5-Year Average ROE: 15.6%
5-Year Average ROIC: 15.2%
D/E versus Industry D/E:0% vs. 19.5%
5-year average pretax PM versus 5-year average industry PM: 10.3% vs. 6.1%
Current P/E versus Industry P/E: 14.5 vs. 18.6
Current P/B versus Industry P/B: 2.9 vs. 3.2
Current P/CF versus Industry P/CF: 10.5 vs. 8.7
Market Cap: $4.21 billion
Source: Wells Fargo
Bed Bath & Beyond
5-Year Average ROE: 25.4%
5-Year Average ROIC: 18.6%
D/E versus Industry D/E: 51.4% vs. 112.7%
5-year average pretax PM versus 5-year average industry PM: 10.4% vs. 6.6%
Current P/E versus Industry P/E: 6.7 vs. 15.1
Current P/B versus Industry P/B: 0.6 vs. 5
Current P/CF versus Industry P/CF: 1.6 vs. 9.6
Market Cap: $1.87 billion
Source: Wells Fargo
