Three Stocks Buffett Could Love

The company has manageable debt. Earnings were $5.7 billion, while debt is $4.9 billion, meaning debt can paid off with less than a year's worth of earnings. Return on equity over the last 10 years has been a very strong 30.3%, and has never dipped below 26.9% during this period (the strategy sets a minimum of 10%).

Return on capital has also been strong -- 23.9% averaged annually for the past decade -- and never dropped below 18.5% (9% is the minimum required for ROC).

PepsiCo also has positive cash flow per share, another plus. Another good mark is that management has earned shareholders a return of 16.1% on earnings retained.

All of this financial analysis says the company is performing well. At this point, the strategy shifts to analyzing the stock's price, and looks for an expected average annual return to the investor of about 15% or more over the next 10 years, given today's price level. PepsiCo shareholders, according to our analysis, can expect a return of 15.4%, which indicates the stock is a good buy at this time.

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Hansen Natural (HANS - commentary - Cramer's Take) is another consumer products company liked by the Buffett strategy. This company's best-known product is Monster Energy, the second-largest energy drink, which is the fastest-growing segment of the beverage industry.

Hansen's earnings have been reasonably predictable, the company has no long term debt (that is impressive), return on equity is consistent and high (25.4% on average over the past 10 years), while return on capital is also very strong (24.2% during the past decade). Cash flow is positive and management has earned shareholders a high-energy 40.2% return on the earnings retained. In terms of what shareholders can expect to earn annually given the stock's current price, the analysis produces an effervescent 21%.

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At the time of publication, Reese's clients were long PepsiCo and Harley-Davidson, 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 the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. 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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