Stock Screen: Acing the Buffett Test
S&P turns up 33 Buffett-style stocks in the latest screen tracking the Berkshire Hathaway chief's investing criteria

Warren Buffett has earned a reputation as one of the preeminent value investors of all time. His Berkshire Hathaway (BRKA) holding company has stakes in insurance, publishing, retailing, and manufacturing, among other businesses, and its investment portfolio includes more than $76.0 billion (as of Sept. 30, 2008) of marketable equity securities. 

However, like others in the financial-services industry, Berkshire Hathaway has been hurt by a challenging economic environment. In 2008, the shares registered a decline of 31.8%, outperforming the S&P 500, which fell 37% for the year. 

In recent months, Buffett disclosed he made investments, for Berkshire Hathaway's investment portfolio, in Dow Chemical (DOW), General Electric (GE), Burlington Northern Santa Fe (BNI), and Goldman Sachs (GS), among others. 
The Method

But how does Buffett make his picks? What exactly is "Warren's Way?" In his rare public remarks, and widely followed annual letters to Berkshire shareholders, Buffett makes it sound very simple: He says he buys stocks that are "available at a sensible price." In fact, Buffett uses very sophisticated screens to determine which companies belong in his portfolio. 

Specifically, he uses these five investment criteria: 

• Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million. 

• Net profit margin of 15% or more. 

• Return on equity of at least 15% for each of the past three years and the most recent quarter. 

• A dollar's worth of retained earnings creating at least a dollar's worth of shareholder value over the past five years. 

• Ample liquidity. Only stocks with a market capitalization of at least $500 million are included. 

In the Standard & Poor's "Warren Buffett" screen, we added one more criterion to eliminate overvalued stocks. Overpriced stocks are identified by comparing our five-year discounted cash flow (DCF) estimate with the current price.

The Names

The list that appears at the end of this story contains the 33 stocks that met the six requirements. For more info on the companies on the list, view this slide show.) This is a quantitative screen; the stocks listed are not necessarily recommended by S&P equity analysts. It is important to note that these are not stocks that Buffett has purchased or announced plans to purchase. They are simply stocks that meet the criteria that Buffett has emphasized in the past. 

In 2008, the Buffett portfolio fell 39.4% vs. a 38.5% decline in the S&P 500 on a capital appreciation basis.