Three Stocks Buffett Would Love

The much-watched Warren Buffett made headlines recently with his landmark purchase of Burlington Northern Santa Fe (BNI - commentary - Trade Now). When Buffett makes such a large acquisition, it is tempting to try to anticipate his next move and buy companies that seem likely to attract his interest. I do not believe that makes for a compelling investment strategy -- no one but Buffett knows what he is looking at now, and buying prospective targets could put you into stocks that are poor investments.

So I won't play the game of "What will Warren buy next?" However, I have long used a computerized strategy based on Buffett's investment approach to pick stocks, and I think this is a good time to take a look at stocks that get high grades from this strategy. Like Buffett himself, this strategy has performed well; this year it is up 38.4%, compared with the S&P 500's 21.0%.

One company that passes the Buffett test is China Mobile (CHL - commentary - Trade Now), the largest provider of mobile phone services in China. The Buffett strategy favors companies with dominant market positions, and that is certainly true of China Mobile. Predictability of earnings-per-share growth is another variable the strategy tracks, and China Mobile's EPS has gone up in each of the past 10 years. Debt is less than 10% of earnings, which means it can be paid off in a couple of months, which is exceptional.

Return on equity has averaged 23.1% over the past 10 years, which is great, while return on total capital has been just as impressive, having averaged 20.8% in the past decade. This strategy also looks at a company's prospects and current stock price and projects how much investors are likely to earn annually if they buy the stock. Usually, the strategy wants a projected 15% return, though sometimes it will accept a bit less. This is no problem for China Mobile -- its projected annualized return to investors is 18.1%, which is excellent.

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At the time of publication, Reese was long MTD, FAST and CHL, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of two investing books, including The Guru Investor: How to Beat the Market Using History's Best Investment Strategies (Wiley). Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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