Recently, I wrote an article that examined what legendary investor Warren Buffett looks for in a stock. I noted that he focuses on high-quality companies, likes to see a strong return on equity (ROE), and also prefers companies with low debt. These attributes have helped him generate incredible stock market returns and consistently smash the S&P 500 index for over 50 years now.
Today, I’m going to take Buffett’s stock selection criteria and apply the methodology to the FTSE 100 index. Are there any UK stocks that Buffett might be interested in right now? Let’s take a look.
Warren Buffett stock screen
To screen for Buffett-type stocks, I’m using investment platform Stockopedia’s screen function and the stock selection criteria I have entered is as follows:
- FTSE 100 stocks
- Return on equity % 5-year average > 15%
- Long-term debt/equity % < 50%
- Market-cap > £5bn
Essentially, this stock screen is designed to identify large companies with low debt levels that are consistently generating a healthy return on equity.
Of course, it’s important to realise that this is a fairly simplistic screen that ignores plenty of other things that investors should always consider, such as revenue and earnings growth, plus dividends and valuation ratios. But let’s see what names this simple screen throws up.
High-quality FTSE 100 stocks
The screen generates 18 FTSE 100 names, which are sorted by market capitalisation and shown below:
Shire
Ferguson
Smith & Nephew
Hargreaves Lansdown
3i
InterContinental Hotels
Schroders
Whitbread
Burberry
Persimmon
Johnson Matthey
Croda International
Segro
St. James’s Place
Paddy Power Betfair
Taylor Wimpey
Easyjet
Halma
So, would Buffett actually buy these stocks?
Top Buffett picks
Naturally, it would be unlikely that he would be interested in all of these stocks. A stock screen simply provides a starting place in investment analysis. However, there are a few names on that list that I believe he could be interested in.
One is investment broker Hargreaves Lansdown, which is a top holding for Britain’s own Warren Buffett, Nick Train. From a Buffett-style investing point of view, Hargreaves ticks a lot of boxes. For example, the company has a very strong position and an excellent reputation in the UK wealth management market, and is well placed to continue growing going forward. Debt is low and return on equity is outstanding, averaging 72% over five years. The only downside is the stock’s valuation. Trading on a forward P/E of 39.2, it’s expensive. Buffett would most likely wait for a more attractive entry point.
Hip replacement specialist Smith & Nephew is another stock that Buffett might take a closer look at, in my opinion. Again, it’s a leader in its field with a strong market position. The group has an excellent track record of generating earnings and dividend growth.
Budget airline easyJet could also fit Buffett’s bill, as the legendary investor currently holds a number of airlines within his portfolio. Trading on a forward P/E of just 11.8, the stock appears to offer value right now.
So there you have it, a look at how Warren Buffett might approach the FTSE 100. While this screen is simplistic, looking for stocks with high ROE and low debt won’t do you any harm. The approach has certainly worked wonders for Mr B over the years.
