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Five Stocks Buffett Should Love

Posted: Mar 02, 2009 10:37 AM by Will Ashworth

Tickers in this Article: TBL, GIL, GES, DECK, CCE, BUD, HANS, WPO, BRK.A

By now, most people are aware that Warren Buffett's 27%-owned Berkshire Hathaway (NYSE:BRK.A) had a miserable year, only the second out of 44 years in which the company's book value per share decreased, reducing its net worth by $11.5 billion (9.6%) in 2008. Despite this setback, Berkshire Hathaway's book value per share has grown at a compounded annual rate of 20.3%, which compares favorably to an increase of 8.9% for the S&P 500 over the same period. $10,000 invested in the Omaha-based holding company in 1965 is worth $34 million today. In the last five years (2004-2008), Berkshire's annualized growth in book value was 7.3%, which compares favorably with the S&P 500's lack of growth over that time. So, despite Berkshire's recent dip, the glass is still very much half-full for long-term shareholders.

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And Buffett doesn't just like his own company to show high book value per share - he likes to see this metric in the companies he invests in as well. Let's take a look at five companies that might meet the "Oracle's" approval.

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The Name of the Game Is Book Value
Warren Buffett buys companies with strong brand names in understandable businesses. The profits and cash flows of those businesses should be predictable, with a strong return on capital using as little debt as possible. You don't tend to see him investing in biotechnology or semiconductor businesses and, most importantly, the firms he chooses have owner-oriented management, like the Graham family's Washington Post (NYSE:WPO), providing long-term focus.

Five Buffett Might Like
While I would never profess to possess the investment prowess of Buffett, the Oracle might consider the following five companies as potential stocks for his portfolio. Screening for those companies whose market caps are greater than $500 million and returning more than 20% annually on their capital for the last five years, the list is an understandable bunch. At the top of the heap is Hansen Natural (Nasdaq:HANS), the maker of Monster energy drinks. Hansen incurred $118.2 million in termination costs in its fourth quarter ended December 31, 2008, due to a conversion to Anheuser Busch (NYSE:BUD) and Coca-Cola Enterprises (NYSE:CCE) distributors in both the U.S. and Canada. Add these costs back in, and the 12-month operating income increased 22%, to $281.7. The company's hyper-growth in recent years led to an average annual increase in book value of 63%. This could be too fast for Buffett, although Hansen's partnership with Coke and Budweiser could tempt him.

Next on deck is the maker of the ultra-hip UGG boot, Decker's Outdoor (Nasdaq:DECK). Its shares dropped 14% in pre-market trading February 27, as it announced earnings per share in 2009 could drop below the $7.27 it achieved in 2008, and well below analysts' estimate of $8.05. It's feared that UGG's growth is over and inventories are building. While it may not grow book value by 32.3% (its five-year growth rate) in 2009, it most certainly should deliver at least double-digit growth. Buffett would probably buy it if it weren't so small.

Rounding out the list of companies doing a good job of building book value over the past five years include Guess? (NYSE:GES) at 27.2% annually, Gildan Activewear (NYSE:GIL) at 22% and Timberland (NYSE:TBL) at 10.4%. Both Gildan and Timberland will have their work cut out for them in 2009.

Bottom Line
Perhaps the only chink in Warren Buffett's armor is his insistence on investing primarily in large-cap stocks. Because Berkshire Hathaway can't take positions in smaller capitalized companies without driving the price higher, Berkshire might want to explore creating a closed-end fund or separate public company it can control that would have more of a mid-cap/small-cap focus, enabling it to buy some of the companies it naturally favors, but is unable to purchase due to pricing pressures. (To learn more, read Why Warren Buffett Envies You.)

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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