Of all the longer-term investors out there, Warren Buffett is probably the most notable. It's hard not to like this guy. Other than being an astute investor, he is also a notable contributor to various charities. Let's dive into exactly how the "Oracle of Omaha" came to be, as well as his investing style and, finally, how to trade options using Warren Buffet stocks. According to Wikipedia,

Warren Edward Buffett (born August 30, 1930) is a United States stock investor, businessman and philanthropist. Buffett has amassed an enormous fortune from astute investments, particularly through his company Berkshire Hathaway, in which he holds a greater than 38% stake. With an estimated current net worth of around US$42 billion, he is ranked by Forbes as the second-richest person in the world, behind only Microsoft chairman Bill Gates. In June 2006, he made the commitment to give away 85% of his fortune, most of which would be going to the Bill and Melinda Gates Foundation. Buffett's donation was the largest act of charitable giving in United States history. Despite his immense wealth, Buffett is famous for his unpretentious and frugal lifestyle. He continues to live in the same house in Omaha he bought in 1958 for $31,500, although he also owns a summer house in Laguna Beach, California. His annual salary from Berkshire Hathaway of $100,000 is small by the standards of senior executive remuneration in the United States.

So let's discuss why you are really reading this cover story. Yes it's nice to know about Warren Buffett, but what you really want to know is his criteria for picking value stocks. Okay, here is a breakdown on what we have discovered in the search for Warren Buffett picks:

Warren Buffet is a value investor. That means he doesn't participate in wildly running growth stocks; in fact, he was ridiculed for staying out of the tech boom in the late '90s. Of course, we all know how right he was just after the year 2000, when everything DotCom collapsed. Warren Buffett has a unique style when it comes to investing, so without writing a novel on the subject, let me get to the point of what he looks for.

Brand Recognition - One of his key criteria" is the company well known? Does it have a stronghold in its core products with consumers? The company has to be a recognized brand in its industry for Warren Buffet to consider it as part of his holdings.

Earnings Consistency - Warren looks for a growing company with no negative years of earnings growth in past 5 years. IF the company has had at least one year of negative earnings growth in the last 5 years, it will not be considered. BTW, Long term Earnings Per Share [EPS] growth indicates that the company is growing over time. The EPS of a company must be continually growing.

Long-term Debt - This is the company's long term or multi year debt structure it currently has. This could include mortgages, long term bank notes, etc. In order to pass the Warren Buffet test, long term debt must not be greater than 2 times net income. This is a liquidity measure to ensure that the company has not taken on too much risk through its borrowings.

Return On Equity - Return on Equity [ROE] measures the return on shareholders funds or shareholders equity. ROE is calculated by dividing the net profit by shareholder equity and multiplying it by 100 to express the result as a percentage. The higher the ROE, the better. Buffet requires a return on equity of 15% or more.

Capital Expenditure - Free cash flow per share is the amount of money that is free to be spent. It is cash flow minus all expenses. Buffet likes free cash flow per share to be positive.

Utilization of Returned Earnings - This is all about seeing if management is using retained earnings to increase shareholder value. In order to be increasing shareholder value according to Buffett's methodology, retained earnings should provide a return that is 15% or better but he will accept if a company has a return that is better than 12%. So what stocks are hitting all of Warren Buffets criteria now?

Chart 1: Coach

Coach (COH) is passing 100% of the Value Hunter criteria based on the published criteria of Warren Buffet.


Chart 2: Apple

Apple Computer (AAPL) is also making a 100% on fundamental criteria used by Warren Buffet. Check the charts for yourself, but the fundamentals are telling a bullish story.


Tom Gentile
Chief Strategist
Profit Strategies Group, Inc.