Introduction
The book Buffettology describes the investment principles that Warren Buffett uses to evaluate many of his investments. This screen is inspired by these principles. The goal of the screen is to find fundamentally strong businesses with a great track record of creating shareholder value in the past 10 years, and where an investor will likely earn more than the risk free rate in the market. More on Buffett's decision making process can be found here.
Screen Details
This stock screen looks for large cap stocks over $5 billion in market capitalization that meet the investment criteria as laid down in the Buffettology book. The company should have a 10-year track record of generally increasing EPS with no negative earnings years; long-term debt not more than 5 times annual earnings; average ROE over the past ten years at least 15%, average ROIC over the last 10 years at least 12%, and earnings yield should be higher than the long term Treasury yield. Full details of the screen are as follows.
- Earnings Yield > 3%
- EPS now > EPS 5 years ago, and EPS 5 years ago > EPS 10 years ago
- 10 year average ROE > 15%
- Long Term Debt <= 5*Net Income
- 10 year average ROIC >12%
- EPS > 0 in each of the past 10 years
We have also ignored Financial Services and Real Estate sectors due to future concerns.
The Screen Results
Stock | Company | Sector | Earnings Yield (%) | Price/Graham Number |
|---|---|---|---|---|
CE | Celanese | Basic Materials | 5.8 | 2.9 |
NEU | NewMarket | Basic Materials | 4.9 | 3.2 |
PPG | PPG Industriess | Basic Materials | 3.9 | - |
CBS | CBS | Communication Services | 19.3 | - |
DIS | Walt Disney | Communication Services | 4.2 | - |
OMC | Omnicom Group | Communication Services | 7.5 | - |
TLK | Telekomunikasi Indonesia | Communication Services | 5.2 | 1.9 |
BKNG | Booking Holdings | Consumer Cyclical | 5.2 | 7.9 |
BWA | BorgWarner | Consumer Cyclical | 8.6 | 1.4 |
GIL | Gildan Activewear | Consumer Cyclical | 4.8 | 2.0 |
GNTX | Gentex | Consumer Cyclical | 5.8 | 2.0 |
GPC | Genuine Parts | Consumer Cyclical | 5.2 | - |
LEA | Lear | Consumer Cyclical | 11.2 | 1.1 |
MGA | Magna International | Consumer Cyclical | 10.0 | 1.0 |
NVR | NVR | Consumer Cyclical | 5.7 | 2.1 |
ORLY | O'Reilly Automotive | Consumer Cyclical | 3.9 | - |
PKG | Packaging Corp of America | Consumer Cyclical | 7.3 | 1.9 |
POOL | Pool | Consumer Cyclical | 3.1 | 7.6 |
ROST | Ross Stores | Consumer Cyclical | 3.9 | 3.9 |
TSCO | Tractor Supply | Consumer Cyclical | 4.8 | 2.8 |
ULTA | Ulta Beauty | Consumer Cyclical | 5.0 | 2.6 |
VFC | VF | Consumer Cyclical | 3.8 | 6.0 |
WSM | Williams-Sonoma | Consumer Cyclical | 6.3 | 1.9 |
CHD | Church & Dwight Co | Consumer Defensive | 3.5 | - |
CLX | Clorox | Consumer Defensive | 4.2 | - |
HRL | Hormel Foods | Consumer Defensive | 4.0 | 3.4 |
HSY | Hershey | Consumer Defensive | 4.1 | - |
MNST | Monster Beverage | Consumer Defensive | 3.3 | 5.0 |
PEP | PepsiCo | Consumer Defensive | 6.4 | - |
PM | Philip Morris Intl | Consumer Defensive | 5.8 | - |
TPL | Texas Pacific Land Trust | Energy | 6.2 | 2.9 |
AMGN | Amgen | Healthcare | 5.6 | - |
BIIB | Biogen | Healthcare | 9.6 | 2.2 |
HSIC | Henry Schein | Healthcare | 5.7 | - |
HUM | Humana | Healthcare | 5.6 | 2.2 |
ICLR | Icon | Healthcare | 4.1 | 4.1 |
JAZZ | Jazz Pharmaceuticals | Healthcare | 6.9 | - |
NVO | Novo Nordisk | Healthcare | 4.3 | 4.4 |
RDY | Dr Reddy's Laboratories | Healthcare | 5.6 | 1.9 |
UNH | UnitedHealth Group | Healthcare | 4.9 | - |
WAT | Waters | Healthcare | 3.6 | - |
ADP | Automatic Data Processing | Industrials | 3.2 | 7.1 |
ALK | Alaska Air Group | Industrials | 7.2 | 1.5 |
AME | AMETEK | Industrials | 3.8 | - |
AOS | A.O. Smith | Industrials | 5.1 | 3.0 |
AYI | Acuity Brands | Industrials | 6.4 | 2.7 |
CHRW | C.H. Robinson Worldwide | Industrials | 6.2 | 5.1 |
CMI | Cummins | Industrials | 8.9 | 1.6 |
CNI | Canadian National Railway | Industrials | 5.2 | 2.0 |
CPRT | Copart | Industrials | 3.3 | 4.2 |
CSX | CSX | Industrials | 6.0 | 1.8 |
CTAS | Cintas | Industrials | 3.3 | - |
DAL | Delta Airlines | Industrials | 12.5 | 5.3 |
DCI | Donaldson | Industrials | 3.7 | 4.0 |
EMR | Emerson Electric | Industrials | 5.1 | - |
EXPD | Expeditors International | Industrials | 4.9 | 2.3 |
FAST | Fastenal | Industrials | 3.9 | 3.0 |
GGG | Graco | Industrials | 4.1 | 4.1 |
GWW | W.W. Grainger | Industrials | 5.4 | 3.7 |
HON | Honeywell International | Industrials | 4.9 | - |
HUBB | Hubbell | Industrials | 4.8 | - |
HXL | Hexcel | Industrials | 4.4 | 2.4 |
ITW | Illinois Tool Works | Industrials | 4.4 | - |
JBHT | JB Hunt Transport Servs | Industrials | 3.7 | 2.7 |
LECO | Lincoln Electric Holdings | Industrials | 5.4 | 3.1 |
LII | Lennox International | Industrials | 3.7 | - |
LMT | Lockheed Martin | Industrials | 5.5 | - |
LUV | Southwest Airlines | Industrials | 7.9 | 1.4 |
MMM | 3M | Industrials | 5.0 | - |
NDSN | Nordson | Industrials | 3.3 | - |
NOC | Northrop Grumman | Industrials | 5.2 | - |
NSC | Norfolk Southern | Industrials | 5.4 | 1.6 |
ODFL | Old Dominion Freight | Industrials | 4.2 | 2.3 |
PAYX | Paychex | Industrials | 3.5 | 10.5 |
PH | Parker Hannifin | Industrials | 5.7 | - |
RHI | Robert Half International | Industrials | 6.7 | 2.2 |
RTN | Raytheon | Industrials | 5.5 | - |
SNA | Snap-On | Industrials | 7.9 | 1.5 |
TTC | Toro | Industrials | 3.3 | 8.9 |
UNP | Union Pacific | Industrials | 4.9 | 2.5 |
WSO | Watsco | Industrials | 3.8 | 3.1 |
AAPL | Apple | Technology | 4.5 | 3.6 |
ACN | Accenture | Technology | 3.7 | 4.6 |
AMAT | Applied Materials | Technology | 5.0 | 3.1 |
APH | Amphenol | Technology | 3.7 | - |
BR | Broadridge Financial Soln | Technology | 3.2 | - |
CHKP | Check Point Software | Technology | 4.4 | 2.7 |
CTSH | Cognizant Tech Solns | Technology | 5.8 | 2.1 |
FFIV | F5 Networks | Technology | 4.9 | 3.7 |
INFY | Infosys | Technology | 5.3 | 2.1 |
INTC | Intel | Technology | 7.4 | 2.0 |
IPGP | IPG Photonics | Technology | 3.5 | 2.1 |
MSFT | Microsoft | Technology | 3.5 | 5.0 |
NTAP | NetApp | Technology | 6.7 | - |
ORCL | Oracle | Technology | 5.5 | - |
STX | Seagate Technology | Technology | 10.6 | 3.9 |
SWKS | Skyworks Solutions | Technology | 4.9 | 2.3 |
TEL | TE Connectivity | Technology | 6.3 | 2.6 |
TSM | Taiwan Semiconductor | Technology | 4.1 | 2.4 |
VMW | VMWare | Technology | 10.2 | - |
WIT | Wipro | Technology | 6.4 | 1.6 |
XLNX | Xilinx | Technology | 4.1 | 3.6 |
CIG.C | Energy Co of Minas Gerais | Utilities | 8.2 | 0.8 |
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Notes and Observations
It is worth reminding that Earnings Yield is inverse of a P/E ratio and for Price/Graham Number filter, we generally want the value to be as low as possible.
This screen is not designed to give you the most undervalued companies based on any particular metric. Buffettology is different from the Grahamian screens. This screen aims to find quality companies selling at cheap to fair prices that have some moat that they can sustain over time. The value creation comes from the company's successful protection of its moat so it continues to earn a ROE in excess of the market.
However, we can certainly be partial to the cheapest of the stocks in this list. Automotive sector seems to be specially cheap with a low P/Graham Number scores. We would review LEA and MGA further.