The Oracle of Omaha is the investing legend whose battle-tested strategies many people try and copy in their own personal portfolios. Some of his most-famous investments, over the course of the past few decades, have been widely successful. This has made him one of the world’s richest men.
I am sure most of us would have been excited to buy into Coca-Cola, Wells Fargo and Geico at the beginning stages of their success. The time has unfortunately passed for investors to get in on the ground floor in these companies. Take a read here for why we see trouble ahead for Coca-Cola.
The next best option is to find the next great company Warren Buffet would be interested in.
Easier said than done right?
Most people would die for the stock picking skills of this world famous investor. With the power of Vuru’s stock screeners it becomes much easier than one might think. First of all, let’s look at what Warren searches for in a company.
Return on Equity: For every dollar invested in the company, Warren looks for the company to generate at least $1.15 in profits. These company’s have a management team that can find and invest in profitable opportunities. These companies also have the profits available to continue to be able to grow.
Pricing Power: The more your company can charge for a product, the more money they will make. Look at the gross margins of the company, are they more than 40%? This is what Warren looks for in his investments. Companies with gross margins larger than this have better products than their competitors and are realizing more profits for item sold.
Competitive Advantage: Warren looks to invest in companies with net profit margins of at least 20%. After the gross margin, how much does it cost the company to operate all of the behind the scenes functions? HR, finance, accounting… the less the company spends on these roles, the more money leftover for investors
Capex/CFO: The key to this metric is the thinking about how much capital is required to fund the company’s operations. The more capital intensive the company is, the more this will drain on the cashflow of the company. Warren looks for companies that require less than 50% of their cash flow to spent on capital expenditures.
Based on this analysis, what sort of companies would Warren be looking at now? Looking at Vuru’s screening technology - with the power of the Buffet Calculator - we can see 10 such companies. All of these companies meet the previously mentioned criteria.
Each of these companies are leaders in their industry and many have been providing sold returns to their shareholders in recent years. Some of them may be considered in the same league as Coca-Cola and Wells Fargo, in the sense that the company has reached maturity, but each company is also generating more than enough income to fund future growth. This is something that KO and WFC cannot say for themselves.
The calculator serves as a way to determine prospective investments. The next step is to think of the valuation these companies currently trade at. Apple is trading at 17x its earnings while Visa is trading at 42x. Despite being good companies, it can be argued that either of these companies are still overvalued. Once you’ve found a good company that meets your criteria, it’s equally important to consider if it is also reasonably priced. The screener is a powerful tool, but it’s only half the battle.
To use the Buffet Calculator, or make a screener of your own, head here to use the Vuru screening technology
Disclaimer: I am not a financial advisor, please contact one before making any trading decisions of your own. This piece serves as my personal opinion and should not be taken on the basis of a recommendation of trading strategy.