Screening For Warren Buffett Stocks: The Ultimate Strategy?

21st Feb '23 by Roland Head

17 comments 4086 reads

Warren Buffett’s 2022 letter to Berkshire Hathaway shareholders is due to hit the wires very shortly. The Oracle of Omaha always has something worthwhile to say, and his letters usually make for a compelling read.

This year, I think it will be interesting to see what Buffett has to say about the potential impact of higher borrowing costs.

One thing I’m fairly sure of is that his investment strategy won’t change very much as a result. Shares in his company Berkshire Hathaway (NYQ:BRK.A) have risen by a compound average of 20.1% per year between 1965 and 2021, defying wars, recessions and various other crises.

Over the same period, the S&P 500 Index (SP:SPX), including dividends, achieved an average annual return of 10.5%.

Beating the market in this way over such a long period is impressive enough. But the real success of Buffett’s stock-picking strategy becomes clear when we look at the total gains achieved during this time.

Over the 56-year period to 2021, the S&P 500 rose by 30,209% including dividends. Berkshire Hathaway shares rose by 3,641,613% during that time.

Yes, 3.6 million per cent:

le7_tMWKrVtuUk0gwc42o_wZXxkGT0N0k4NYR8IGca1eWXawR2QeQPk4jNsb3BpAFu5atvwiIL1QqPPeP86g8T-tkghGbJlyn_kqrPeYOOfrpL2CRFOFgeP6pBHWPQbR1mxWZnMJ_2EW2nMNhwCCBbI

Source: Berkshire Hathaway 2021 shareholder letter

SInce 1965, Berkshire’s average annual gain has been double the market average. But over the same period, the total gain achieved has been 120 times greater than the index.

This is a graphic example of the power of compounding. By focusing on businesses that can reinvest their earnings profitably over long periods, Buffett has outperformed pretty much every investor in recorded history.

With that in mind, I thought it might be a good time to follow up my recent Terry Smith screen with a Warren Buffett screen. Can I use Stockopedia’s powerful screening tools to find investments with the potential to deliver wonderful compound gains?

Warren Buffett screen criteria

As I did with Terry Smith last month, I used Warren Buffett’s past letters to build a list of criteria for my screen. Although Buffett isn’t quite as explicit as Terry Smith in terms of specifying the metrics he uses, there are a number of themes that crop up regularly.

In addition, Buffett often shares examples from Berkshire’s investments that give us an idea…

Unlock with Email

Unlock with Google

Already have an account?
Login here

shipoffrogs

21st Feb '23

Great article - thank you. But I think a screen for high margins belongs here too.

Roland Head

Hi shipoffrogs,

Thank you for your feedback.

I chose to focus on high ROCE/ROE instead of operating margin, because low-margin businesses can sometimes still generate consistent high returns for shareholders. In the list above, Computacenter (LON:CCC) might be one example of this.

Equally, high-margin businesses don't always provide strong shareholder returns. There can be various reasons for this, including leverage.

Ultimately, though, the screen reflects my interpretation of Buffett's writings. It's not intended to be a rigid set of rules and others would probably do it differently.

Please feel free to make a copy of the screen and play around with the rules if you'd like to see how the results change when you change individual rules.

Regards,

Roland

iwright7

Rowland,

I love the concept.

In relation to: Rule #10: Enterprise Value to Free Cash Flow TTM < 25

This rule doesn't seem to be excluding many companies because the highest company score in the screen is EV/FCH = 18.6. A max UK number of EV/FCF <10 would maybe highlight the "don't over pay" candidates. Arguably a low'ish EV/FCF is the most important of the Value parameters.

My manual screening process tries to imitate what I think are his key criteria -

high margins, little or no debt, light Capex requirements, honest management, a fair price and operating a business that looks like it might still be doing well in 10 years time (which often means it was doing well 10 years ago). Simple, but not easy as his sidekick says.

22nd Feb '23

> which often means it was doing well 10 years ago

I agree. In my experience this is usually safer than hoping that a past underperformer will transform itself. Although this does happen.

Rusty2

I'm surprised Frontier Developments (LON:FDEV) makes the selection, after poor results last year and profit warning in this year. I don't know if it would have been selected a year ago or is it because last year, that the growth looks good?

Think I prefer the Terry Smith selection. I see Gamma Communications (LON:GAMA) is on both but that has not performed very well either.

InvestorJohn

23rd Feb '23

Interesting reading thanks Roland

Anthony Beater

25th Feb '23

Thank you Roland. Much food for thought. I am interested to see the importance of Retained Earnings in Warren Buffett's choices. The slow building up of a company that is a sign of solidity, above the interests of shareholders. Buffett was nothing if not cautious.

Warren Buffett's largest holding at 31.12.22 is Apple (NSQ:AAPL) by a long way, he bought over 330,000 shares last quarter, when the price dipped. Second largest holding is Bank of America (NYQ:BAC), he also has large holding in some oil companies. He also likes insurance companies, some I think he owns outright.

Stockopedia has Apple (NSQ:AAPL) as a falling star now. It only passes 8/11 on this screen, Bank of America (NYQ:BAC) only 6/11.

Mark Simpson also did Buffett screen last year, in case you want to see it: https://www.stockopedia.com/sc...

Michael C

Concerning DCFs, Charlie Munger once said something like this: 'Warren talks a lot about using them but I've never seen him do one'. I think the DCF thing is something Warren does in his head rather than on paper, a rough-and-ready appraisal of what sort of growth will be achieved in the years ahead and whether or not that is reflected correctly in the share price.

Another thing - 20 years ago I saw a carefully researched article showing that despite the often repeated Warrenism that the ideal holding time is forever he is probably the greatest and most successful trader there has ever been. How on earth he manages to buy and sell in the volumes his fund requires is something I do not understand.

Harry Hindsight

Was thinking about Apple (NSQ:AAPL) as a busted flush but as a Mac, ipad, iphone and buds user their seamless inter-connection is not replicated in the Samsung/Android world imo.

So their so called eco-system or moat is strong. A mature business so maybe growth won't be so exponential but a cash generative dividend paying pension hold is probably up Buffetts street.

If Bank of America (NYQ:BAC) gets into trouble then presumably we may as well shut up shop and climb under the mattress with the few gold coins which everyone says should have in your portfolio.

Buffett's history is in insurance. Looked at Sabre Insurance (LON:SBRE) so in the SCVR camp.

Has no debt, cash in bank and assets twice its market cap.

Fell off the cliff from 200p to 100p in July 2022.

The only link is 'insurance' sorry. The days of Buffett looking at small caps has long gone.

The letter is out there on Rolands link. Has made many people so rich they can be philanthropists. The ultimate aim - sort the kids and then put to a good cause J D Wetherspoon (LON:JDW)

BnB

26th Feb '23

I tend to agree that high margins are indicative of pricing power, ie a moat. But the other potential indicator of a moat, in a world where intangibles and intellectual capital define the success of so many businesses, is expenditure on R&D. I would add a filter that screens for high R&D spend, either relative to the sector or to revenues.

Whether such an enhanced screen finds any UK businesses is another matter, as I don’t see much in the way of a moat across the original output of the screen. But you would find plenty internationally.

WarrantStar

Thank you for a very interesting and useful article.

robinleggate

Wouldn't it be simpler to just buy Berkshire Hathaway?

Robert Sanders

27th Feb '23

Thx for this where do you factor in WBs requirement to always buy at a discount to intrinsic value? His "margin of error"

Screening for Warren Buffett stocks: the ultimate strategy?

Warren Buffett screen criteria

Unlock the rest of this article with a 14 day trial

About the Author

Roland Head

17 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...