Warren Buffett, the Oracle of Omaha, is renowned for his long-term value investing approach focused on high-quality companies with durable competitive advantages. While Buffett himself has traditionally avoided technology stocks, that has changed in recent years with Buffett making Apple has largest position. And more and more of the Mag 7 are meeting Buffett’s stringent fundamental tests. Three members of the vaunted “Magnificent 7” group of mega-cap tech leaders currently pass Validea’s quantitative interpretation of Buffett’s investing strategy. Let’s examine why Microsoft, Alphabet, and Apple earn Buffett’s seal of approval based on their fundamentals.
The Buffett Strategy
Validea’s Warren Buffett-inspired stock screen aims to identify companies that meet Buffett’s stringent criteria, including:
- Consistent earnings growth over the past decade
- Above-average return on equity (ROE) of at least 15%
- Conservative debt levels
- Efficient use of retained earnings
- Strong free cash flow generation
- Attractive expected returns based on earnings growth projections
Microsoft (MSFT): A Perfect Buffett Score
Microsoft earns a perfect 100% score from Validea’s Warren Buffett-inspired model, demonstrating remarkable alignment with Buffett’s investment philosophy across multiple criteria. The company has shown exceptionally steady earnings growth, with EPS increasing every year over the past decade from $1.48 to $11.80. This consistent upward trend in earnings is precisely what Buffett looks for in a company.
From a financial perspective, Microsoft’s conservative approach provides a significant margin of safety. With earnings of $87.7 billion versus long-term debt of $67.5 billion, the company could pay off its entire debt in less than two years using its earnings alone. This aligns perfectly with Buffett’s preference for companies with strong balance sheets.
Microsoft’s profitability metrics are equally impressive. The company’s average ROE over the past 10 years is 33.6%, more than double Buffett’s 15% threshold, with a 3-year average ROE of 36.9% showing sustainable and potentially improving profitability. Management’s efficient use of retained earnings is evident in the 25.8% return generated over the past decade, significantly above Buffett’s 12% minimum threshold.
Looking forward, Validea’s model projects Microsoft to deliver an exceptional 18.6% annualized return over the next decade, well above Buffett’s typical 12-15% target range.
Alphabet (GOOGL): Another Perfect Buffett Score
Like Microsoft, Alphabet also scores a perfect 100% on Validea’s Warren Buffett-inspired model. The company’s earnings have grown consistently over the past decade, from $0.99 per share to $5.97, with only one minor dip 2 years ago. This level of predictability suggests a stable and growing business model that can weather various economic conditions.
Alphabet’s financial position is exceptionally strong, aligning perfectly with Buffett’s preference for conservatively financed companies. With earnings of $87 billion compared to long-term debt of just $13.2 billion, Alphabet could pay off its entire debt in less than two years. This conservative approach to leverage provides significant financial flexibility and reduces risk, key factors in Buffett’s investment philosophy.
The company’s profitability metrics are also impressive. Alphabet’s average ROE over the past 10 years is 18.5%, comfortably above Buffett’s 15% threshold, with a 3-year average ROE of 26.4% showing improving profitability. Management has demonstrated efficient use of retained earnings, generating a 17.2% return over the past decade, well above Buffett’s 12% minimum.
Looking ahead, Validea’s model projects Alphabet to deliver a 16.9% annualized return over the next decade, solidly within Buffett’s target range of 15% or higher.
Apple (AAPL): The Quintessential Buffett Stock
Apple not only scores a perfect 100% on Validea’s Warren Buffett-inspired model but is also Berkshire Hathaway’s largest stock holding, comprising over 40% of its equity portfolio. This real-world endorsement from Buffett, combined with Apple’s stellar fundamentals, makes it a quintessential Buffett stock.
Apple’s earnings have grown consistently over the past decade, from $1.61 per share to $6.13, with only two minor dips. This level of predictability demonstrates the company’s ability to generate steady and growing profits across various economic conditions and product cycles.
From a financial standpoint, Apple’s position is exceptionally strong. With earnings of $99.9 billion compared to long-term debt of $86.2 billion, Apple could pay off its entire debt in less than two years. This conservative approach to leverage provides significant financial flexibility and reduces risk, key factors in Buffett’s investment philosophy.
Apple’s profitability metrics are truly exceptional. The company’s average ROE over the past 10 years is an astounding 83.6%, more than five times Buffett’s 15% threshold. Even more impressive is its 3-year average ROE of 164%, which shows exceptional and improving profitability. Management has demonstrated efficient use of retained earnings, generating a 15.9% return over the past decade, well above Buffett’s 12% minimum.
Looking to the future, Validea’s model projects Apple to deliver an exceptional 31.4% annualized return over the next decade, far exceeding Buffett’s target range of 15% or higher.
While Warren Buffett has historically been cautious about investing in technology companies, these three Magnificent 7 stocks demonstrate fundamentals that closely align with his investing philosophy. Their consistent earnings growth, strong profitability, conservative balance sheets, and attractive expected returns make them worthy of consideration for value-oriented investors seeking high-quality companies with durable competitive advantages.
Microsoft, Alphabet, and Apple all exhibit the key characteristics that Buffett looks for in his investments: predictable and growing earnings, conservative financial management, high returns on equity, efficient use of retained earnings, strong free cash flow generation, and attractive projected returns. Moreover, each of these companies possesses a wide economic moat in their respective areas of dominance.
It’s worth noting that Validea’s quantitative interpretation of Buffett’s strategy may differ from Buffett’s actual current investment approach. However, these companies’ strong performance across key fundamental metrics suggests they possess the quality and financial strength that Buffett has traditionally sought in his investments.
Further Research
