With market valuations tumbling near three-year lows as the Covid-19 virus outbreak rattles markets around the globe, GuruFocus Editorial Assistant James Li discusses how investors can seek good opportunities based on Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) co-managers Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio)’s four-criterion investing approach.
The All-in-One Screener, a major GuruFocus Premium feature, identified four such companies: Amgen Inc. (AMGN, Financial), Canadian Pacific Railway Ltd. (CP, Financial), Copart Inc. (CPRT, Financial) and Intel Corp. (INTC, Financial).
A recap of market valuations following a miserable March
As discussed in a previous article, Buffett’s favorite market indicator nosedived from a January high of around 151.10% to approximately 116% on Friday as coronavirus fears hammered markets throughout March.
According to John Hopkins University data, global cases of Covid-19 eclipsed 1 million this week, with over 245,000 cases in the U.S. The Dow Jones Industrial Average closed at 21,052.53, down 360.91 points from Thursday’s close of 21,413.44 and a net 5,650.79 points from the March 2 level of 26,703.32. Apple Inc. (AAPL, Financial), the top holding of Berkshire, closed at $241.41, down 1.44% from the previous close.
Buffett-Munger strategy gives a straightforward, four-criterion approach to investing
Buffett follows a value investing strategy based on that of Benjamin Graham, his mentor at Columbia University in 1951. The “Oracle of Omaha” stated that he seeks investments in companies with four key characteristics: understandable business, favorable long-term prospects, honest and competent management and available at attractive prices.
Key criteria used in Buffett and Munger’s strategy include consistent revenue and earnings growth as measured by GuruFocus’ business predictability rank, strong economic moat, increasing profit margins and trading below fair value based on the price-earnings to growth ratio.
The following video explores how to seek strong Buffett-Munger candidates using GuruFocus’ All-in-one Screener, a major Premium feature. The video illustrates the following filters:
- Market cap of at least $10 billion
- Exclude over-the-counter stocks
- Predictability rank of at least four stars
- PEG Ratio of at most 1.7
- Operating margin of at least 22%
- 5-year Operating margin growth of at least 2%
- 10-year Ebitda Growth Rate between 8% and 20%
Amgen
Amgen manufactures drugs for renal disease and cancer supportive-care products. GuruFocus ranks the company’s profitability 10 out of 10 on several positive investing signs, which include a 4.5-star business predictability rank and a return on equity that outperforms 98.79% of global competitors.
Amgen’s operating margin has increased approximately 5.30% per year on average over the past five years and is outperforming over 98% of global drug manufacturers. Gurus riding Amgen’s strong profitability include PRIMECAP Management (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Canadian Pacific Railway
Canadian Pacific Railway operates a network of railroads across most of Canada and in the Midwest and Northwest regions of the U.S. GuruFocus ranks the Calgary, Alberta-based company’s profitability 10 out of 10 on several positive investing signs, which include a high Piotroski F-score of 8, a five-star business predictability rank and a return on assets that outperforms over 92% of global competitors.
Canadian Pacific’s operating margin has increased approximately 2.5% per year on average over the past five years and is outperforming over 96% of global transportation companies. Gurus riding the company’s high profitability include Steve Mandel (Trades, Portfolio)’s Lone Pine and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates.
Copart
Copart provides online and vehicle remarketing services targeted primarily at insurance companies, car dealerships, fleet operators and vehicle rental companies. GuruFocus ranks the company’s financial strength 7 out of 10 on the back of debt ratios outperforming over 67% of global competitors, coupled with robust interest coverage and Altman Z-scores.
Copart’s profitability ranks 10 out of 10 on further strong investing signs, which include a 4.5-star business predictability rank and operating margins that have increased approximately 5.10% per year on average over the past five years and are outperforming over 96% of global competitors.
Gurus riding Copart’s high profitability include Steven Cohen (Trades, Portfolio)’s Point72 Asset Management and David Rolfe (Trades, Portfolio)’s Wedgewood Partners.
Intel
Intel designs and manufactures microprocessors for the global personal computer and data center markets. GuruFocus ranks the Santa Clara, California-based company’s financial strength 7 out of 10 and profitability 9 out of 10 on several positive investing signs, which include solid interest coverage, a strong Altman Z-score of 4.01, a four-star business predictability rank and a return on equity that outperforms 94.68% of global competitors.
Intel’s operating margin has increased approximately 4.10% per year on average and is outperforming over 96% of global competitors. Gurus riding Intel’s high profitability include PRIMECAP and Ken Fisher (Trades, Portfolio).
Disclosure: As of writing, the author is long Apple and Amgen.
Read more here:
- Warren Buffett’s Market Indicator Falls Near 3-Year Low
- 6 High Financial Strength Stocks John Rogers and Paul Tudor Jones Agree On
- 4 Profitable and Predictable Stocks to Combat Market Volatility
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