What are we looking for?
Inspired by Warren Buffett’s long-standing investment principles, we screened U.S.-listed stocks for large companies with strong returns on capital, consistent earnings growth, healthy margins and manageable debt.
These stocks are not necessarily owned or endorsed by Mr. Buffett or Berkshire Hathaway. The screen measures only selected financial characteristics and does not assess management quality, competitive durability or intrinsic value. Mr. Buffett remains Berkshire’s chairman, while Greg Abel has served as president and chief executive officer since Jan. 1.
The screen
We used Trading Central Strategy Builder to search for U.S.-listed stocks displaying several financial characteristics associated with Mr. Buffett’s long-standing investment approach.
We began with a minimum market capitalization of US$5-billion and a share price above US$10 to focus on larger, more established companies.
To emphasize profitable businesses with efficient capital allocation, we screened for a return on capital of at least 15 per cent and an operating margin above 15 per cent. We also required five-year earnings-per-share growth of at least 5 per cent and a debt-to-equity ratio below 0.85.
Finally, we required a Trading Central Quantamental Rating of at least 50 out of 100. The rating systematically combines 20 indicators spanning valuation, growth, quality, momentum and income, with scores above 50 indicating an above-average overall fundamental profile. The same Quantamental framework forms the foundation of Trading Central’s quantitative indexes, including the index tracked by the Trading Central Quant U.S. 50 Equity Index ETF (TCUS). The additional profitability, leverage and size requirements used here are specific to this screen.
We excluded metals and mining companies because their profits and returns on capital can fluctuate sharply with commodity prices, causing them to appear unusually attractive near the peak of an industry cycle. This makes their recent financial results less representative of the predictable, durable earning power emphasized by Mr. Buffett’s approach. From the qualifying results, we selected 15 companies for presentation.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, Trading Central’s stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Topping our list is Alphabet GOOGL-Q, the parent of Google, whose search, YouTube and Google Cloud businesses anchor its dominance in digital advertising, and it’s one of Berkshire Hathaway’s newer equity holdings. The stock carries a TC Quantamental Rating of 52, supported by a 42.66-per-cent return on capital and low debt-to-equity of 0.18. At 16.89 times earnings against five-year EPS growth of 29.83 per cent, shares have surged 71.3 per cent over the past year and 6.8 per cent year-to-date.
Apple AAPL-Q, the iPhone maker with a fast-growing services arm, remains one of Berkshire Hathaway’s largest publicly traded equity holdings. Its TC Quantamental Rating of 51 reflects an outstanding 68.83-per-cent return on capital and a 32.64-per-cent operating margin, though the stock trades at a richer 40.94 times earnings. Shares are up 61.8 per cent over the past year and 24.8 per cent year-to-date.
Novo Nordisk AS NVO-N, the Danish drugmaker behind GLP-1 treatments Ozempic and Wegovy, has the highest TC Quantamental Rating on our list at 68, driven by a 39.85-per-cent return on capital and a 45.3-per-cent operating margin. Yet it trades at just 12.37 times earnings with a 3.49-per-cent dividend yield, a relatively low multiple compared with the other companies in the table. Competition in the obesity-drug market has weighed on the stock, down 1.5 per cent year-to-date and up just 3.1 per cent over the past year, making it a compelling value contrast to the two mega-caps above it.
Trading Central Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 22-per-cent annualized return compared to 11 per cent for the S&P 500 Index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.