Monster Energy Drink
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Berkshire Hathaway recently disclosed that its largest new equity investment was Aon, a provider of insurance brokerage and other services.
CEO Warren Buffett has long gravitated to companies like Aon (ticker: AON) that have high returns and strong competitive positions.
What other stocks fit the mold? Validea, a quantitative investment research firm that seeks to model the strategies of notable investors like Buffett and Peter Lynch, flagged Aon near the top of its Buffett model.
That model is based on the criteria laid out in the 1999 book Buffettology, by former Buffett daughter-in-law Mary Buffett and David Clark.
Barron’s has selected 10 high-scoring U.S. stocks from the Validea Buffett model, with market values above $10 billion. They include Monster Beverage (MNST), O’Reilly Automotive (ORLY), Mastercard (MA), T. Rowe Price (TROW), and Apple (AAPL), Berkshire’s (BRK.A, BRK.B) largest equity investment at $110 billion.
Among international equities, Alibaba Group Holding (BABA), the Chinese e-commerce giant, gets a perfect score based on the Buffett model. Alibaba, whose shares trade around $220, has been depressed by concerns about Chinese regulatory pressure and now trades for just 20 times forward earnings.
In a recent Barron’s interview, Masayoshi Son, the CEO of SoftBank Group, a large Alibaba shareholder, said the stock was appealing: “It’s a great company, at a low price compared with its fundamentals, so now is not the time to sell.”
“These criteria are trying to get at whether companies have competitive moats around their businesses,” says Justin Carbonneau, a partner at Validea in West Hartford, Conn. He notes that Apple scored highly in the Validea Buffett model six years ago — before Berkshire began buying the stock.
Key factors in the Buffett model include earnings predictability, ample return on equity, and modest debt levels.
The Validea Buffett model favors companies with sustainable earnings growth over the past 10 years, a return on equity over the same period of at least 12% with 15% preferred, and the ability to pay off debt with five years of annual earnings.
The Buffett model also tilts toward companies that repurchase stock, generate free cash flow, and have modest capital expenditures.
Many of the top stocks in the Validea Buffett model have been recognized by investors and carry high price/earnings ratios.
Some are well-known leaders like Apple, Mastercard and Monster Beverage, one of the top sellers of energy drinks. Copart (CPRT) has a niche running used-car auctions, while O’Reilly Automotive is one of three big auto-parts retailers along with AutoZone (AZO) and Advance Auto Parts (AAP).
Barron’s wrote favorably on O’Reilly in April, arguing it was a post-pandemic beneficiary as Americans drive more. The stock isn’t expensive, trading for 20 times trailing earnings, given that analysts see long-term earnings growth of about 10% annually.
T. Rowe Price is one of the best-run asset managers. It has excellent mutual-fund performance and a leadership position in target-date funds, which are popular in retirement accounts. FactSet Research Systems (RDS) is a leading provider of investment research.
Pool (POOL) is the largest global distributor of pool supplies and a pandemic beneficiary as people favored private pools. It reported a 50%-plus gain in first-quarter sales and increased its 2021 earnings guidance by more than 25%, to around $12 a share. At a recent $430, it trades for around 35 times the current-year earnings estimate.
Toro (TTC) is a top maker of commercial lawn mowers and other turf-related products, while Rockwell Automation (ROK) is a producer of a range of industrial automation products.
Write to Andrew Bary at [email protected]
