Saturday, April 27, 2013

S&P buys that pass the Buffett test

S&P The OutlookThe following stocks meet the criteria that Warren Buffett has emphasized in the past.  As such, these stocks might satisfy the "Oracle of Omaha."

How does Buffett make his picks? In short, he uses the following five investment criteria.

● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar's worth of shareholder equity created for every dollar of retained earnings over the past five years.

● Market capitalization of at least $500 million.

The "Warren Buffett" portfolio is maintained by S&P Dow Jones Indices, which operates independently from S&P Capital IQ.

One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

Year to date through February, the Buffett portfolio gained 5.7% vs. a 6.2% increase for the S&P 500 on a capital appreciation basis.

Since inception on February 13, 1995 through February 28, 2013, the portfolio posted an average annual gain of 10.8% vs. 6.6% for the benchmark.

It is important to note these are not stocks Buffett has purchased or announced plans to purchase.

Below are the 6 stocks that pass the above list of criteria and also have a buy-rating from S&P Capital IQ.

Apple (AAPL)
Coach (COH)
Coca-Cola (KO)
Covidien (COV)
Qualcomm (QCOM)
T. Rowe Price Group (TROW)

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