Validea's Top 20 Warren Buffett Stocks - July 2024

Validea's Top 20 Warren Buffett Stocks - July 2024

Validea’s Warren Buffett model using published writings about Buffett to identify stocks that might meet his fundamental tests. The strategy aims to identify high-quality companies with predictable earnings that are trading at attractive prices.

The strategy has two main stages:

Stage 1: Identifying “Buffett-type” companies

  • Look for companies with strong brand recognition or “consumer monopolies”
  • Seek predictable earnings – no negative EPS in the past 10 years (with some exceptions)
  • Conservative financing – long-term debt should be payable from 5 years of earnings or less
  • High return on equity (ROE) – 10-year average ROE of at least 15%
  • High return on total capital – 10-year average of at least 12%
  • Positive free cash flow
  • Good use of retained earnings – at least 12% return on retained earnings

Stage 2: Determining if the price is attractive

  • Initial rate of return (earnings yield) should be higher than the 10-year Treasury bond yield
  • Calculate expected return using two methods:
  1. ROE method – project equity growth and earnings over 10 years
  2. EPS growth method – project EPS growth over 10 years
  • Average the two expected returns – should be at least 12%, preferably 15% or higher

The model aims to replicate Buffett’s patient, value-oriented approach of buying great businesses at good prices and holding for the long-term. It emphasizes predictable earnings, strong competitive advantages, conservative financials, and management that allocates capital effectively to generate high returns for shareholders. While it cannot fully capture Buffett’s qualitative insights, it provides a systematic way to apply core principles of his investing philosophy.

Here are the top ten highest scoring stocks for July 2024 for Validea’s Patient Investor strategy based on Buffett.

Further Research

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