Validea's Top Ten Warren Buffett Stocks - September 2024

Validea’s Warren Buffett strategy, also known as our “Patient Investor” strategy, is inspired by the investment principles of Warren Buffett, as interpreted from the book Buffettology by Mary Buffett. This strategy aims to emulate Buffett’s long-term, value-based approach to investing. Below are the key criteria and principles that define this strategy:

Key Criteria

Earnings Predictability and Stability: Companies should have a consistent earnings history over the past decade, indicating stable and predictable earnings. This aligns with Buffett’s preference for businesses that can generate steady profits over time.
High Return on Equity (ROE): The strategy looks for companies with a high return on equity, typically above 15%. A high ROE indicates that a company is efficiently using its equity to generate profits, a hallmark of quality businesses that Buffett favors.
Strong Return on Total Capital (ROTC): The strategy also considers a company’s return on total capital, seeking those that generate strong returns on both equity and debt capital. This reflects the ability to generate profits from all financial resources, not just equity.
Free Cash Flow Generation: Companies must generate significant free cash flow, which is the cash remaining after all expenses and capital expenditures. Buffett values free cash flow as it provides the company with the flexibility to reinvest in growth, pay dividends, or reduce debt.
Use of Retained Earnings: Management should earn a solid return on retained earnings. This shows that the company is effectively reinvesting its profits to generate additional earnings.
Valuation: Once a company meets the fundamental criteria, the strategy looks to buy stocks at attractive prices based on long-term valuation metrics. Validea calculates the expected annual return using both earnings-based and book value-based approaches, requiring a minimum expected return of 12%.

Here are the top ten highest scoring stocks for September 2024 for Validea’s Patient Investor strategy based on Buffett. The most notable change since August is that Apple has fallen off the list due to its valuation, as its earnings yield is no longer higher than the long-term treasury yield.