Buffett: Gone Shopping?

A screen searching for stocks Warren Buffett (BRK.B) may be interested in turned up 28 names, but only one – ADM – is a current Berkshire holding.

Most likely to catch the Oracle’s eye from the rest of the list, writes Jack Hough in Barron’s — Screening For Stocks Buffett Might Buy , is Sysco (SYY), Cummins (CMI), and Illinois Tool Works (ITW). [Seeking Alpha]

On closer examination, we’d concur on Sysco (SYY) but I’m not so sure about most of the others.

A few years ago I wrote an article that took a look at Coca-Cola through the eyes of Warren Buffett and our stock analysis methodology … as he might have seen it back in 1988-89.

The bottom line is that he appears to embrace quality and projected returns as we’d expect any disciple of Graham to do.

And in that regard, I don’t think there are 28 companies on his list. At least not these 28 companies:


Value Line Low Total Return Screen (3/1/2013)

Companies of Interest

Normally we limit the list of companies to the highest annualized total return candidates that also have a first or second quintile quality ranking. I made an exception in this case for Southwest Airlines (LUV) because of the forecast boosts in this week’s updates — earning LUV a spot on the Materially Stronger part of the update.

Materially Stronger: Clean Harbors (CLH), CoStar Group (CSGP), Gartner (IT), Genessee & Wyoming (GWR), Jack in the Box (JACK), Southwest Airlines (LUV)

Materially Weaker: Arkansas Best (ABFS), Frontline (FRO), United Parcel Service (UPS)

Market Barometers

The Value Line low total return forecast is 7.2%, down slightly from 7.3% last week.

Although we could face a correction near-term, no alarms are sounding on the New Highs vs. New Lows trend … suggesting that protective measures are not yet necessary. The S&P 500 relative strength index has relaxed back to 55.9 after recently being in the overbought (>70) range. Be selective and with MIPAR at 7%, select high-quality and bias overall portfolio quality and financial strength to the higher end of long-term target ranges.

Challenge Club (February 2013)

Challenge Club – February 2013

It’s more than a mantra. When things get a little tough, battle-tested investors go shopping.

And they go shopping with a specific shopping list in hand — a quest to identify leadership companies selling at attractive prices.

The Challenge Club has more than a little cash on hand (10.9% of total assets) so we need some candidates.

Bring out your best.

Current dashboard: http://www.manifestinvesting.com/dashboards/public/challenge-club

Register to attend Saturday morning’s meeting/webcast at:



“I would like to see AFLAC under your scope.” — Jack Ellison

Thanks, Jack. For those who don’t know Mr. Ellison — he’s one of the leaders of the award-winning GaAs investment club near Sacramento, California. Gallium Arsenide (GaAs) is a compound of the elements gallium and arsenic and the chemical is used in the production of semiconductor devices. The connection to and inspiration from Silicon Valley is pretty clear.

The GaAs investment club was the leading group in the Value Line/NAIC club portfolio contest back in 2001 and was honored at the 50th anniversary national convention in Detroit.

AFLAC Duck: Uhhhh … he said arsenic. I really wish he’d not do that.

MI: No worries. Besides, we thought the only thing you ever said is “AFLAC!”

AFLAC Duck: That’s my stage persona.

MI: We hope the healing process is going well and sorry to hear of your set back.

AFLAC Duck: Thanks. I needed some rest. Since I stopped that whole migration thing … it’s way, way over-rated, by the way … I’ve gotten a little pudgy. A little time here with the workout equipment in Physical Therapy is probably just what the doctor ordered. Hollywood can wait.

MI: You’re not concerned that a gecko or some furry critter will steal your spot?

AFLAC Duck: Always a concern. Who are we kidding? Wally Pipp thought it’d be OK to take a day off. If you see any critters around the offices in Columbus that remind you of Gehrig, let me know.

MI: Consider it done. And now for a closer look at a community favorite and paragon of stability over the decades. But at the same time, we could make a case for a couple of really big speed bumps over the last few years — and some turbulent challenges that we’d consider more temporary than terminal.

AFLAC Duck: Terminal is not such a good word either around here.

MI: Sorry. Get well soon.

Aflac, Inc. provides supplemental life and health insurance services. The company is a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its principal business is supplemental health and life insurance, which is marketed and administered through its subsidiary, American Family Life Assurance of Columbus, which operates in the United States and as a branch in Japan. The company operates business through two segments Aflac Japan and Aflac U.S. The Aflac Japan segment provides child endowment and ways products and operates as a branch of Aflac and principal contributor to consolidated earnings of Aflac. The Aflac U.S. segment sells voluntary supplemental insurance products including, loss-of-income products and products designed to protect individuals from depletion of assets. AFLAC was founded by John Amos, Paul Amos and William Amos on November 17, 1955 and is headquartered in Columbus, GA. [Wall Street Journal]

Business Model Analysis

The top-line for financial sector companies like AFLAC is book value (BV). The bottom line is EPS, as always — and the relationship (difference) between the top-line and bottom-line for financial sector companies is return-on-equity (ROE) and we pay close attention to the profitability trend on display for ROE.

Projected Average P/E

The forecast for a future P/E ratio for AFLAC is little different from the rest of the banking and/or insurance industry. Will ROE return to historical levels or “labor” in the New Normal? As an investor in financial sector enterprises, this is a key assumption or judgment.

In the case of AFLAC, we’d probably argue for stabilization and statistically a median of 10x (plus or minus 2x) seems to be reasonable.

Equity Analysis Guide

Using the 11% book value growth rate, a ROE forecast of 13% and a projected average P/E of 10x — the projected annual return is 11.6%.

This compares to a Value Line low total return forecast of 11.5%.

With the median return (all stocks) at 7.1%, the 11.6% return forecast is fairly compelling — particularly when considering the 99th percentile quality ranking for AFLAC (AFL).

Groundhog VII: And They’re OFF!

We’re hoping for a large measure of market-obliterating performance during the Groundhog VII — our stock selection contest for 2013 — but the start out of the gate is a little choppy (so far).

Yes, we know it’s early. Really, really early.

But so far, a relatively small number (16%) of participants have topped the Wilshire 5000 a few weeks into our version of a Groundhog-based Iditarod.

Starting block kudos to perennial group challenger, The Mutual Investment Group of Cheney and individual entrants Jerry Warner, Susan Lynch and Larry Dix. There’s a couple of rhinos (Warren Buffett and Whitney Tilson) on the leader board — and 2011 individual champion Nick Stratigos is lurking, as usual.

You can find the consensus favorites here: Heavy Hogs for 2013

And the full scoreboard here; Groundhog VII Scoreboard

Run, Punxsy Phil. Run.