Fear remains, so I'll stay greedy (like Buffett)

My Buffett MSN Top Stocks portfolio continues to perform well. In this post I take a look at some of the top rated stocks according to the Buffett-based approach.

By John Reese Oct 23, 2009 10:52AM

Back in mid-June, I started tracking a Warren Buffett-inspired portfolio over on Wall Street Survivor. The model is one I’ve run my site, Validea.com, since 2005 and at the time I launched the portfolio publicly on MSN Top Stocks there were a number of apparent reasons to be wary of the market -- high unemployment, huge U.S. debts, and the struggling state of the American consumer, to name a few.

 

*Check out my complete Buffett-inspired tracking portfolio at Wall Street Survivor

 

Despite those concerns, I was comfortable going with a fully invested, long-only approach. One reason was that, in addition to using the quantitative parts of Buffett's approach in my Guru Strategy computer model, I also try to keep in mind some of "The Oracle of Omaha's" broader pieces of advice when investing. And one point he often stresses is "Be greedy when others are fearful".

 

That's what I did, and it's paid off. Since I started tracking it on June 15, my Buffett-based portfolio is up about 26% (vs. about 16% for the S&P 500).


The full record since then is available on Wall Street Survivor. For the year, through October 20th, my Buffett portfolio on Validea.com is up over 49% making it the second best performing guru strategy I track on my site.

 

While sentiment has improved over the past several months, there are still some very strong fears out there. And that Wall of Worry -- and the fact that my Buffett model is still finding some very good buys even after the recent market surge -- are signs that stocks have more room to run.

 

What in particular is my Buffett strategy high on now?

 

Among its current favorites are some stocks that have already made big gains for my portfolio. At the head of the list is GPS giant Garmin, Ltd. (GRMN). It's up about 78% since my model snagged it on June 15, and it still gets a perfect 100% score from the Buffett approach. A couple reasons: The firm has no long-term debt, and it has averaged a return on equity of 28.5% over the past ten years -- a sign of the "durable competitive advantage" Buffett likes to see.

 

Another of the portfolio's original June picks that's fared well and continues to look solid is ITT Educational Services (ESI), which is up about 20%. The for-profit degree program upped earnings per share in each year of the past decade, and its debt is less than its annual earnings, two reasons the Buffett model still gives it a 100% score.

 

One more big winner that still gets a 100% score: Infosys Technologies (INFY), which has gained 33% since the portfolio picked it up on July 10. While Buffett shies away from tech firms, I allow my model to dive in to the sector, given how much more mainstream it is than when Buffett started out. And with ten straight years of increased EPS and a ten-year average ROE of 32.6%, the firm certainly has the financial hallmarks of a Buffett-style company.

 

Three of my other initial picks -- Imperial Oil (IMO), Pre-Paid Legal Services (PPD), and China Mobil (CHL) -- haven't fared as well, but my Buffett model thinks they may have some big moves in them. All still get 100% scores from the strategy.

 

The Newbies

 

More recently, the portfolio has honed in on a couple retailers and a financial -- not too surprising given Buffett's "greedy when fearful" mantra, as both those areas are the subject of some major lingering concerns. But two of the three -- World Acceptance Corp. (WRLD) and Aeropostale (ARO) -- have upped EPS in each year of the past decade, and the other -- Coach, Inc. (COH), has increased earnings in all but one of those years, showing they can make money in a variety of different climates.

 

In addition, the two retailers have little or no debt and 10-year average returns on equity of more than 30%, while WRLD (which I recently highlighted here) has been generating a return on assets greater than 10% over the past decade -- very impressive for a financial.

 

If you follow Buffett at all, you know he's the first to admit that he doesn’t know where the market is heading tomorrow, next week, or next month, and I'm no different. But the stocks my Buffett-inspired portfolio has been keying in on are all strong businesses with track records of success, and they're selling at good prices -- in part because fear still remains relatively high in the market. So while others may remain on the sidelines, I'll keep snatching up these types of solid bargains, and over the long term I think I'll be rewarded for it.

 

Disclosure: I'm long GRMN, ESI, INFY, PPD, CHL, IMO, ARO, COH, and WRLD.

 

John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".

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