The Best Warren Buffett Stocks To Consider In This Falling Market

(Source: Imgflip)

Warren Buffett is viewed as the greatest investor in history, generating approximately 20% CAGR total returns since 1965 at Berkshire Hathaway (BRK.B).

Those returns aren’t the best ever delivered, a title held by Renaissance Technologies, whose Medallion Fund has delivered 39% CAGR post fee returns since 1988.

But while a handful of investors may have achieved stronger annualized returns than Buffett, none have thus far been able to deliver such returns for a period of over 50 years. Which is why most people consider Buffett the greatest investor of all time. Thus, it’s not surprising that many people take particular interest in the companies Berkshire owns in its almost $200 billion portfolio.

In this article, I wanted to not just showcase some of Berkshire’s holdings, but also run them through Joel Greenblatt’s “Magic Formula That Beats The Market”.

(Source: Imgflip)

Greenblatt is one of those handful of investing legends who managed to beat Buffett’s annualized returns, though for “just” a period of 21 years.

It should be noted that over 10+ years, 90% of returns are a function of fundamentals, and over 20 years, 91% are.

In other words, over a decade or longer, significant outperformance such as Buffett and Greenblatt is 90% to 91% skill, 9% to 10% luck.

My fellow Dividend King, Chuck Carnevale, Seeking Alpha’s “Mr. Valuation”, recently did a Dividend Kings exclusive F.A.S.T. Graphs video series using Greenblatt’s Magic Formula to screen for dividend blue-chip ideas for our members.

Why is one of the most respected and third-most widely followed (almost 60,000 followers and counting) analysts on Seeking Alpha highlighting Greenblatt’s Magic Formula?

The Track Record Of The Magic Formula Is Impressive

Greenblatt used a proprietary and more advanced version of the Magic Formula when he delivered those 40% CAGR total returns over 21 years, multiplying investor wealth 1,171-fold in just over two decades.

However, the principles of the Magic Formula can be summarized by just two proven long-term investing principles.

Greenblatt offers the public version of the Magic formula to everyday investors as a way to screen for both using two proxies for these two proven alpha factors.

Alpha factors are those attributes that companies have that on their own generate statistically significant and lasting outperformance over the long term.

There are seven factors, and many of them are highly correlated. For example, high-quality dividend growth blue-chips (two alpha factors) tend to also have below-average volatility and are usually smaller than the S&P 500’s average market cap of $167 billion.

Combining alpha factors together is a proven method for achieving long-term outperformance and is a prudent strategy.

Combined Alpha Factor Total Returns Since 1997

(Source: Ploutos)

It’s also a great way to avoid “market envy” where certain strategies can, and will, invariably spend many years underperforming.

For example, the longest period of time that any factor has underperformed the market was value from 1926 to 1941, a period of 15 years that challenged the discipline of even the most hardened value investors.

Meanwhile, small caps spend 27% of rolling ten-year periods underperforming, as they have over the past decade.

No alpha factor can work all of the time, because if it did, everyone would use it, trillions of dollars would pour into such stocks, and valuations would become extreme, resulting in future underperformance.

In other words, only because no strategy works all of the time does any strategy, consistently followed, work over time.

How did the Magic Formula, combining quality and growth, do over time?

(Source: Quant Investing)

Over the 16-year period from 1988 to 2004, which included the tech bubble when value was heavily out of favor, it averaged 33% annual returns, 120% greater than the US stock market, and 136% more than the S&P 500.

Over this time period, we can say with 90% confidence that the overall strategy (skill) was what delivered those impressive returns, rather than luck. The Magic Formula has also proven to work in several European countries, with similarly impressive outperformance.

But how exactly does the Magic Formula work, and how can we use it to help us determine which Buffett stocks are the best ones worth buying in this overvalued market?

Quality First: It’s Better To Buy A Wonderful Company At Fair Price Than A Fair Company At A Wonderful Price

Greenblatt’s focus on quality and value makes intuitive sense, but how exactly does he define quality and value? Those are subjective terms, with many ways of defining them.

(Source: Imgflip)

Greenblatt considered return on capital to be the gold standard for overall company quality and moatiness (a concept Buffett is also famous for championing).

Joel Greenblatt defined Return on Capital differently in his book The Little Book That Still Beats the Market (Little Books. Big Profits). He defines ROC (Joel Greenblatt) % as EBIT divided by the total of Property, Plant and Equipment and net working capital.”

– GuruFocus

The simplest way to think about return on capital is annual EBIT (earnings before interest and taxes) divided by operating capital. That basically means pre-tax profit/the money it takes to run the business.

For example, Cisco Systems (CSCO), which is not a Buffett stock, generated a 549% return on capital in Q2.

(Source: GuruFocus)

This means that, if you annual the company’s pre-tax profits in Q2, Cisco earned $5.49 for every dollar it takes to run the business.

Over the past 13 years, its median ROC was 371%, with Cisco’s earnings being $3.71 per $1 it takes to run the business. Over the past five years, the company’s ROC has been rising 9.6% CAGR, indicating improving profitability and a widening moat.

The company’s TTM ROC of 557% is in the top 0.48% of hardware makers, meaning that of 2,300 major rivals, Cisco is more profitable than all but 11.

As far as Joel Greenblatt is concerned, Cisco is one of the highest-quality companies in the world.

But even the greatest companies can make terrible investments… if you pay too high a price.

(Source: F.A.S.T. Graphs, FactSet Research)

Cisco, at the tech bubble peak, was almost 800% historically overvalued. The valuation risk was so high that even though the company grew at almost 9% CAGR, 50% faster than the S&P 500, for 20 years, investors who paid 132X earnings for a company historically valued at 13-14 are still waiting to break even.

Which brings us to the second half of the Magic formula, valuation.

Valuation: Never Knowingly Overpay For A Company… No Matter The Quality

Greenblatt used earnings yield, the inverse of the P/E ratio, in his magic formula, though other forms of the formula (that have proven to yield similar results) use things like EV/EBITDA, price-to-cash flows, etc.

Chuck Carnevale agrees, calling earnings yield the “essence of valuation”, though he and the Dividend Kings use operating earnings, not GAAP (diluted) earnings.

Not every Berkshire company (there are 51 in total) can be screened with the Magic formula. ROC can’t be calculated for banks, and some of Buffett’s holdings are generating negative diluted EPS at the moment.

However, 25 of them presented here in the order of largest portion allocation, have both positive TTM diluted earnings yields, as well as Greenblatt ROC that can be calculated.

Ticker ROC (%) P/E 13-Year Median ROC 13-Year Median PE ROC/Historical ROC Historical Overvaluation
AAPL 194.33 33.37 301.64 15.56 64% 114%
KO 104.71 22.93 69.23 23.42 151% -2%
MCO 289.18 30.41 406.76 21.6 71% 41%
DVA 26.15 12.96 59.1 21 44% -38%
CHTR 19.81 58.61 12.67 52.81 156% 11%
VRSN 328.23 29.69 183.29 26.11 179% 14%
V 549.87 37.26 422.35 30.19 130% 23%
GM 3.35 28.13 18.19 7.58 18% 271%
LSXMK 95.18 25.59 107.02 26.1 89% -2%
AMZN 18.16 115.49 14.56 149.43 125% -23%
MA 532.11 44.96 830.03 28.86 64% 56%
COST 22.65 41.27 23.3 28.61 97% 44%
KR 13.41 10.2 17.04 14.39 79% -29%
STOR 1821.49 22.81 544.62 30.4 334% -25%
GOLD 33.1 10.8 8.57 11.3 386% -4%
STNE 26.49 87.88 26.02 58.69 102% 50%
AXTA 13.61 66.52 19.45 70.06 70% -5%
LSXMA 95.18 25.72 107.02 26.1 89% -1%
RH 20.98 42.71 12.54 39.62 167% 8%
SIRI 83.41 22.91 76.14 34.95 110% -34%
BIIB 159.76 7.96 150.21 18.94 106% -58%
JNJ 94.98 25.42 102.99 19.61 92% 30%
PG 77.93 27.63 67.74 20.89 115% 32%
MDLZ 37.16 23.06 33.28 18.81 112% 23%
UPS 19.19 32.18 28.92 21.7 66% 48%
Average 187% 35.5 146 32.7 121% 22%

(Whale Wisdom, GuruFocus)

Buffett’s companies indeed appear high-quality, with an average return on capital of 187%. What’s more, their TTM ROC is actually 21% above their 13-year median, indicating likely wide and stable moats.

However, most are also historically overvalued, so let’s see how the Magic Formula can screen for the best Buffett stock you can consider safely buying today.

The Magic formula is very simple:

  • Rank all companies by ROC and assign points, with the highest-ROC company getting one more point than the second-highest, etc.
  • Rank all companies by earnings yield (inverse of P/E), and also apply points, in the same fashion as we did with ROC.

So let’s see what the Magic Formula says are the best Buffett stocks you can buy right now.

Buffett Stocks Ranked By Magic Formula Score (TTM ROC, TTM Diluted Earnings Yield)

Ticker ROC P/E 13-Year Median ROC 13-Year Median PE ROC/Historical ROC Historical Overvaluation Quality Score Valuation Score Total Score
STOR 1821.49 22.81 544.62 30.4 334% -25% 25 21 46
BIIB 159.76 7.96 150.21 18.94 106% -58% 19 25 44
KO 104.71 22.93 69.23 23.42 151% -2% 18 19 37
GOLD 33.1 10.8 8.57 11.3 386% -4% 11 23 34
SIRI 83.41 22.91 76.14 34.95 110% -34% 14 20 34
VRSN 328.23 29.69 183.29 26.11 179% 14% 22 12 34
LSXMK 95.18 25.59 107.02 26.1 89% -2% 17 16 33
JNJ 94.98 25.42 102.99 19.61 92% 30% 15 17 32
MCO 289.18 30.41 406.76 21.6 71% 41% 21 11 32
V 549.87 37.26 422.35 30.19 130% 23% 24 8 32
DVA 26.15 12.96 59.1 21 44% -38% 9 22 31
LSXMA 95.18 25.72 107.02 26.1 89% -1% 16 15 31
MDLZ 37.16 23.06 33.28 18.81 112% 23% 12 18 30
AAPL 194.33 33.37 301.64 15.56 64% 114% 20 9 29
MA 532.11 44.96 830.03 28.86 64% 56% 23 5 28
PG 77.93 27.63 67.74 20.89 115% 32% 13 14 27
KR 13.41 10.2 17.04 14.39 79% -29% 2 24 26
UPS 19.19 32.18 28.92 21.7 66% 48% 5 10 15
COST 22.65 41.27 23.3 28.61 97% 44% 8 7 15
GM 3.35 28.13 18.19 7.58 18% 271% 1 13 14
RH 20.98 42.71 12.54 39.62 167% 8% 7 6 13
STNE 26.49 87.88 26.02 58.69 102% 50% 10 2 12
CHTR 19.81 58.61 12.67 52.81 156% 11% 6 4 10
AXTA 13.61 66.52 19.45 70.06 70% -5% 3 3 6
AMZN 18.16 115.49 14.56 149.43 125% -23% 4 1 5

(Whale Wisdom, GuruFocus)

However, there are a few big issues with the Magic formula, especially when applied to a small collection of companies as in this case.

  • Valuations are, on an absolute basis, not compared to a company’s historical norm, i.e., the market-determined fair value for that company.
  • ROC doesn’t work well for all sectors, even if it can be calculated (such as REITs, midstream, and utilities).
  • TTM ROC can be impacted by short-term events, such as this recession.
  • GAAP EPS is the incorrect metric to use for some sectors/industries, such as REITs, midstream, yieldCos, and most LPs.

However, using the standard version of the Magic Formula, the top five Buffett stocks to consider today are:

  • STORE Capital (STOR)
  • Biogen (BIIB)
  • Coca-Cola (KO)
  • Barrick Gold (GOLD)
  • Sirius XM (SIRI)

STOR 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

BIIB 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

KO 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

GOLD 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

SIRI 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

Some of these Magic Formula Buffett stocks, such as STOR, BIIB, and SIRI, appear to be interesting candidates for further due diligence. Others appear far less appealing, such as KO and GOLD, which appear to be overvalued and thus offering weak returns.

So let’s now consider an alternative version of the Magic Formula.

  • Use 13-year median ROC to smooth out profitability over time.
  • Use P/E vs. 13-year median P/E to determine whether a company is undervalued relative to its market-determined fair value TTM GAAP P/E multiple.

Buffett Stocks Ranked By Magic Formula Score (13-Year Median ROC, Historically Undervalued)

Ticker ROC P/E 13-Year Median ROC 13-Year Median PE ROC/Historical ROC Historical Overvaluation Quality Score Valuation Score Total Score
STOR 1821.49 22.81 544.62 30.4 334% -25% 24 21 45
BIIB 159.76 7.96 150.21 18.94 106% -58% 19 25 44
SIRI 83.41 22.91 76.14 34.95 110% -34% 15 23 38
DVA 26.15 12.96 59.1 21 44% -38% 12 24 36
LSXMK 95.18 25.59 107.02 26.1 89% -2% 18 16 34
V 549.87 37.26 422.35 30.19 130% 23% 23 10 33
LSXMA 95.18 25.72 107.02 26.1 89% -1% 17 15 32
VRSN 328.23 29.69 183.29 26.11 179% 14% 20 12 32
KO 104.71 22.93 69.23 23.42 151% -2% 14 17 31
MCO 289.18 30.41 406.76 21.6 71% 41% 22 7 29
MA 532.11 44.96 830.03 28.86 64% 56% 25 3 28
KR 13.41 10.2 17.04 14.39 79% -29% 5 22 27
AXTA 13.61 66.52 19.45 70.06 70% -5% 7 19 26
JNJ 94.98 25.42 102.99 19.61 92% 30% 16 9 25
AMZN 18.16 115.49 14.56 149.43 125% -23% 4 20 24
AAPL 194.33 33.37 301.64 15.56 64% 114% 21 2 23
MDLZ 37.16 23.06 33.28 18.81 112% 23% 11 11 22
PG 77.93 27.63 67.74 20.89 115% 32% 13 8 21
GOLD 33.1 10.8 8.57 11.3 386% -4% 1 18 19
RH 20.98 42.71 12.54 39.62 167% 8% 2 14 16
CHTR 19.81 58.61 12.67 52.81 156% 11% 3 13 16
UPS 19.19 32.18 28.92 21.7 66% 48% 10 5 15
COST 22.65 41.27 23.3 28.61 97% 44% 8 6 14
STNE 26.49 87.88 26.02 58.69 102% 50% 9 4 13
GM 3.35 28.13 18.19 7.58 18% 271% 6 1 7

(Whale Wisdom, GuruFocus)

There is quite a bit of difference here, such as AMZN going from #25 (dead last) to #15. Note that AMZN’s best valuation metric is price/operating cash flow, which CEO Jeff Bezos says is the metric he’s attempting to maximize over time.

This shows the limitations of any very simple screening process, even one as proven and powerful as the Magic Formula.

Let’s consider the top 5 Berkshire Stocks (not all of BRK’s companies are bought by Buffett himself) from this new modified Magic Formula screen.

  1. STOR still #1: 15.1% CAGR 2022 consensus return potential
  2. BIIB still #2: 25.9% CAGR 2022 consensus return potential
  3. SIRI still #3: 38.3% CAGR 2022 consensus return potential
  4. DaVita (DVA): 27.2% CAGR 2022 consensus return potential
  5. Liberty SiriusXM Group (LSXMK): 21.6% CAGR consensus return potential

DVA 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

LSXMK 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

Now let’s compare against the highly overvalued S&P 500, most people’s default to owning individual companies.

S&P 500 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

Unlike the original version of the Magic Formula, when we substitute historical Return On Capital and historical valuation, we get five Berkshire holdings that appear to have market-crushing potential.

Screening Is Only The First Step In Due Diligence

Just because a company like DaVita is owned by Berkshire and appears to have 27% CAGR short-term consensus return potential doesn’t mean you should run out and buy it. First, you must make sure that you understand what it does.

DVA Business Summary

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates about 3,000 facilities worldwide, mostly in the U.S., and treats over 235,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government ( primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represent nearly all of the profits generated by DaVita in the U.S. dialysis business.”

– Morningstar

The company’s business appears attractive, given that obesity and again are highly correlated with diabetes, and thus, dialysis is expected to benefit from a secular demand trend in the coming decades.

DVA Business Update

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients in the United States with an expanding, albeit small, international operation. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S. through de novo expansion and acquisitions. We expect it to continue growing in a similar fashion globally to benefit from ongoing growth of the ESRD patient population, although new regulatory initiatives in the U.S. may alter the firm’s strategy slightly.

Specifically, in the U.S., the Trump administration aims to expand home-based treatments and transplants for ESRD patients, and as one of the top ESRD caregivers in the country, DaVita aims to benefit from those initiatives, particularly home-based dialysis treatments. DaVita currently leads in coordinating home-based dialysis in the U.S., and management claims it remains indifferent to whether a patient receives dialysis treatments in its clinics or in the home. Additionally, we suspect clinics would benefit from extending the at-home treatment stage, which helps patients continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare takes the lead and determines reimbursement rates for ESRD treatments.

Eventually, most ESRD patients will need in-clinic therapy unless they receive a kidney transplant. Unfortunately for ESRD patients, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. We do not expect that to change dramatically on a sustainable basis. And while they wait, most ESRD patients will need to receive dialysis treatment either at home or in the clinic.”

– Morningstar

DaVita appears to have growth winds at its back in the short term as well, with minimal short-term negative political risks.

However, every company has risks, and so, it’s important to keep in mind what DaVita’s are.

Risks To Be Aware Of

While reimbursement pressure could arise in the U.S., we see medium uncertainty around DaVita’s ongoing cash flows given its essential service and strong position in the U.S. dialysis industry.

One risk surrounds the U.S. healthcare policy debate. Currently, DaVita depends on commercial insurance patients for virtually all of its profits, as it operates near break-even levels for Medicare patients and its international operations are only modestly profitable. So if a substantial part of the company’s U.S. commercial patients were to convert to Medicare-level reimbursement rates, its profits would likely drop substantially. While a Medicare-for-All scenario was debated in the Democratic primaries, we see a public option as much more likely for the U.S. healthcare system during the foreseeable future, and while some uncertainty surrounds how that would affect employer-based insurance plans, we think the downside risks would be manageable for DaVita at this point.

We also see some uncertainty around efforts to treat more ESRD patients at home. Positively, the need for dialysis clinics will not evaporate in that scenario since at-home patients need to be trained and monitored even if they don’t receive treatment in the clinic. However, we recognize that one of the firm’s major intangible assets (convenient locations) may become less important and could influence returns.

In the very long term, technology threats, such as regenerative medicine or mechanical devices that eliminate the need for dialysis, could emerge and disrupt DaVita business model, although we see those threats as very unlikely in the foreseeable future.”

– Morningstar

One flaw in the Magic Formula that can be partially alleviated by substituting EV/EBITDA (which factors in debt) is that it ignores the balance sheet.

(Source: GuruFocus)

DaVita has a very high debt burden, with:

  • TTM debt/EBITDA of 3.7 vs. 3 or less safe, according to credit rating agencies
  • TTM interest coverage of 3.4 vs. 8+ safe
  • Debt/capital: 70% vs. 40% safe for most companies
  • F-score: 7/0 vs. 4+ safe, 7+ very safe = very low long-term bankruptcy risk
  • Z-score: 1.48 vs. 1.81 safe and 3+ very safe = relative high long-term bankruptcy risk
  • M-score -3.01 vs. -2.22 or less safe = ultra-low accounting fraud risk

Most disturbing is the Altman Z-score being persistently low, indicating that DaVita’s long-term bankruptcy risk is relatively high.

The Altman Z-score is an advanced accounting metric that is 84-92% accurate at forecasting bankruptcies over 30 years. It being persistently low (DVA’s 13-year median Z-score is 2.17, which is safe but borderline), along with chronically high leverage, indicates that the stock is likely not investment grade.

Which is indeed the case.

  • S&P credit rating: BB (junk) negative outlook: 17% 30-year bankruptcy risk (possibly rising to 21% soon)
  • Moody’s credit rating: Ba2 (BB equivalent) stable outlook, 17% 30-year bankruptcy risk

Credit Rating 30-Year Bankruptcy Probability
AAA 0.07%
AA+ 0.29%
AA 0.51%
AA- 0.55%
A+ 0.60%
A 0.66%
A- 2.5%
BBB+ 5%
BBB 7.5%
BBB- 11%
BB+ 14%
BB 17%
BB- 21% (if downgraded by S&P)
B+ 25%
B 37%
B- 45%
CCC+ 52%
CCC 59%
CCC- 65%
CC 70%
C 80%
D 100%

(Sources: Dividend Kings Investment Decision Tool, S&P, University Of St. Petersburg)

Junk bond-rated companies like DaVita are inherently riskier than investment grade ones, especially in a recession.

For example, DaVita’s BB junk bond credit rating results in higher costs of capital, but more importantly, means that its risk of going bankrupt and wiping out your investment are almost 7X higher than an A-rated companies.

DVA 2025 Consneus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

DVA’s 13.5% CAGR long-term growth consensus and modest discount to fair value mean that, if it grows as expected, and returns to historical fair value, then 19.1% CAGR total returns are possible.

That may seem great, and compared to the S&P 500’s expected returns, it certainly is. But remember that the S&P 500’s fundamental risk is zero.

While the S&P 500’s valuation risk is sky-high right now, and thus, short-term volatility is elevated, the 500 largest companies in America have effectively zero risk of going bankrupt. If they did, it means the apocalypse has likely killed us all and no one will care about portfolios, money, or anything else.

DaVita Risk-Adjusted Expected Return Calculator

5-Year Consensus Annualized Total Return Potential 19.1%
Conservative Margin Of Error Adjusted Annualized Total Return Potential 9.55%
Bullish Margin Of Error Adjusted Annualized Total Return Potential 28.65%
Conservative Probability-Weighted Expected Annualized Total Return 5.73%
Bullish Probability-Weighted Expected Annualized Total Return 22.92%
Mid-Range Probability-Weighted Expected Annualized Total Return Potential 14.33%
Ratio vs. S&P 500 3.90
Bankruptcy Risk 17.00%
Probability Of No Bankruptcy 83.00%
Risk-Adjusted Expected Total Return 11.89%
Ratio vs. S&P 500 3.24

(Source: Dividend Kings Investment Decision Tool)

When we adjust for the margins of error that must be considered for forecasting five-year time horizons (when just 44% of returns are a function of fundamentals), as well as the probability that analysts are wrong about DVA’s growth rate, we find that its actually risk-adjusted expected returns are about 12% CAGR.

That’s according to the Gordon Dividend Growth Model, the most accurate long-term forecasting tool ever devised. Which is why it’s used by

  • BlackRock
  • Vanguard
  • Ritholtz Wealth Management (where Ben Carlson, Joshua Brown, Michael Batnick, and Nick Magiuelli work)
  • Brookfield Asset Management
  • Oaktree Capital
  • Chuck Carnevale
  • All the Dividend Kings

DVA Total Returns Since 1996

(Source: Portfolio Visualizer)

  • Risk-adjusted expected return: 11.9% CAGR vs. 11.4% CAGR over the past 24 years
  • Mid-range probability weighted return: 14.3% CAGR vs. 14.4% average 10- and 15-year rolling returns
  • Long-term analyst growth consensus: 13.5% CAGR = approximate total return expected over time (as valuation changes cancel out over the long term)

I’m not saying DaVita is a bad company, nor that it might not potentially be worth owning at the right price (it is undervalued at the moment). However, it’s important to remember that long-term financial success is about pricing risk appropriately and being adequately compensated for a company’s risk profile and the potential for it to go out of business.

Bottom Line: Screening Buffett Stocks Is A Prudent First Step For Long-Term Investing Ideas

Sourcing investing ideas from Warren Buffett or the Joel Greenblatt Magic Formula, or a combination of the two, can be a reasonable and prudent first step in finding potentially attractive companies for your diversified and prudently risk managed portfolio.

However, it’s merely the first step because:

  • Your time horizon and financial goals are likely very different than Buffett’s.
  • Your risk profile is certainly different.
  • Balance sheets are critically important to understand and managing long-term fundamental risk (of companies going to zero and losing all your money).
  • Not all simple screening methods are appropriate for all industries and sectors.

Among the Magic Formula Buffett stocks that appear most attractive, I consider STORE Capital and Biogen to be the most compelling candidates for further research (they both have solid investment-grade credit ratings).

However, next month, I’ll reveal the Buffett stocks I consider to be the absolute best long-term investments conservative investors should actually buy, including the ones I and Dividend Kings own in our portfolios.

These are the companies to which I and many Dividend Kings members are entrusting our hard-earned savings, and that are offering a mouthwatering combination of:

  • Extremely high quality
  • Very attractive valuation
  • Strong long-term growth potential
  • Generous, very safe, and steadily rising income
  • Risk-adjusted expected returns that are 90% likely to put the S&P 500 to shame
  • Some offer risk-adjusted expected returns so strong as to make grown men weep with joy

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Disclosure: I am/we are long CSCO, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns CSCO and AMZN in our portfolios.

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