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6 Buffett-Munger Stocks for Spring 2019

- By James Li

According to the newly-designed Buffett-Munger Screener page, the top six companies meeting Berkshire Hathaway Inc. (BRK-A)(BRK-B) co-managers Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio)'s four-criterion investing approach as of Tuesday were Skyworks Solutions Inc. (SWKS), Alliance Data Systems Corp. (ADS), Miller Industries Inc. (MLR), Southwest Airlines Co. (LUV), The Kroger Co. (KR) and NVR Inc. (NVR).


Buffett-Munger strategy hinges on four key criteria

Buffett and Munger "want companies that they understand, with favorable long-term prospects, operated by honest and competent people and available at an attractive price." More specifically, such companies have strong and consistent revenue and earnings growth, i.e., a high business predictability rank; positive operating profit margin growth, no meaningful debt, and attractive price based on the price-earnings-to-growth ratio.

Figure 1 illustrates the predictability chart for Ulta Beauty Inc. (ULTA), a company that has a five-star business predictability rank and a five-year operating margin growth rate of 1.70%, two key characteristics of Buffett-Munger companies. Ulta also made the Buffett-Munger list, but the stock is slightly overvalued with a PEG ratio of 1.15.

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Figure 1

As Figure 1 illustrates, Ulta has strong and consistent revenue and earnings growth over the past 10 years, justifying its five-star predictability rank.

Table 1 lists the number of Buffett-Munger stocks for each region as of March 12.

Region

Count

U.S.A.

42

Canada

5

U.K.

15

Europe

58

Asia

72

Oceania

0

Latin America

18

Africa

3

India

27



Table 1

Skyworks Solutions

With a PEG ratio of 0.43, Skyworks Solutions is the top-ranked stock on Buffett and Munger's list of companies.

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Irvine, California-based Skyworks manufactures products like power amplifiers, filters and integrated front-end modules for wireless handsets. GuruFocus ranks the company's financial strength and profitability 9 out of 10 on several positive signs, which include no long-term debt, a robust Altman Z-score of 15.26 and operating margins that have increased approximately 11.60% per year over the past five years.

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Gurus with large holdings in Skyworks Solutions include Jim Simons (Trades, Portfolio)' Renaissance Technologies, Richard Snow (Trades, Portfolio) and Ray Dalio (Trades, Portfolio).

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Alliance Data Systems

With a PEG ratio of 0.55, Alliance Data Systems ranks number two on the Buffett-Munger screener list.

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The Plano, Texas-based company provides marketing, loyalty and credit solutions in the U.S., Canada and other countries. Although the company's profitability ranks 9 out of 10, Alliance Data's financial strength ranks a poor 4 out of 10 on several weak signs, which include increasing long-term debt over the past three years and an Altman Z-score that implies possible bankruptcy within the next two years.

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Parnassus Fund manager Jerome Dodson (Trades, Portfolio) said in his fourth-quarter shareholder letter that Alliance Data detracted from the fund's returns. Shares sank as the company's delinquency rates underperformed management's expectations while loan growth decelerated. Despite this, Dodson also mentioned Alliance Data's management is repositioning its loan portfolio by "discontinuing partnerships with struggling mall-based apparel retailers" and focusing more on "growing verticals" like hospitality, home furnishings and e-commerce.

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Miller Industries

With a PEG ratio of 0.57, Miller Industries ranks third on the Buffett-Munger list.

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Miller Industries manufactures a wide variety of towing and recovery equipment under brands like Century, Challenger, Holmes, Champion and Eagle. The Chattanooga, Tennessee-based company said last week that net sales for the quarter ending December 2018 were $180 million, up 12.70% from the prior-year quarter on increases in production capacity and a favorable economic environment. Miller Industries' three-year revenue growth rate of 9.50% is outperforming over two-thirds of global competitors. Other positive indicators, which include expanding profit margins and a return on equity near a 10-year high of 15.75%, contribute to a GuruFocus profitability rank of 8.

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Southwest Airlines

With a PEG ratio of 0.58, major Buffett airline holding Southwest Airlines ranks fourth on the Buffett-Munger screener list.

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Dallas-based Southwest operates approximately 700 Boeing Co. (BA) aircraft through a network of point-to-point, short-haul flights. GuruFocus ranks the airline's profitability 8 out of 10 on several positive investing signs, which include expanding profit margins, consistent revenue growth and a dividend yield near a 10-year high. Southwest's margins and returns are outperforming over 85% of global airlines.

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Berkshire slightly reduced its holding in Southwest during the quarter, selling 1.2 million shares for an average price of $52.84.

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Kroger

With a PEG ratio of 0.63, Kroger is number five on the Buffett-Munger list.

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The Cincinnati-based grocery store said last week that total sales for the three months ending Feb. 2 were $28.1 billion, down 9.5% from total sales during the prior-year quarter. GuruFocus ranks the company's profitability 7 out of 10: although the three-year revenue growth rate of 9.70% outperforms two-thirds of global competitors, operating margins have declined approximately 8% per year over the past five years and are underperforming 65% of global competitors.

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NVR

With a PEG ratio of 0.64, NVR is sixth on the Buffett-Munger list.

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The Reston, Virginia-based company constructs and sells single-family detached homes, town homes and condos. GuruFocus ranks the company's profitability 9 out of 10 on several positive signs, which include expanding profit margins, a strong Piotroski F-score of 7 and a three-year revenue growth rate that outperforms 82% of global competitors.

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See also

We are proud to announce we have launched new versions of all of our predefined screener pages, which include the Ben Graham Net-net screen, the Undervalued Predictable screen and the Buffett-Munger screen. Table 2 lists the value screener record as of March 12.

Screener

USA

Canada

UK

Europe

Asia

Oceania

Latin America

Africa

India

Graham Net-Net

264

60

52

294

610

10

5

16

63

Undervalued Predictable

69

5

32

91

60

5

31

6

7

Buffett-Munger

42

5

15

58

72

0

18

3

27

Peter Lynch PE

35

1

16

46

67

0

5

4

4

Peter Lynch PS

123

9

53

147

99

7

33

27

18

Peter Lynch PB

173

23

77

182

104

7

37

25

33

Lynch p2ebitda

191

9

58

220

128

8

13

17

20

Hist Low PS

50

2

21

43

56

0

15

6

12

Hist Low PB

54

2

22

47

57

3

20

10

13

High Div Yield

72

7

10

100

27

13

14

9

2

Magic Formula

4065

536

1924

6135

12910

552

805

370

2528



Table 2

Premium members have access to all of our screens, including the All-in-one Screener that allows you to customize your own investing strategy. We have launched a new version of the Screener as well.

Disclosure: As of this writing, the author is long ULTA.

Read more here:

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  • Warren Buffett's Top 6 Holdings as of December 2018


This article first appeared on GuruFocus.