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Scott Black’s Top 5 Stocks and Why He Likes Them
Posted by: Holly LaFon (IP Logged)
Date: September 24, 2012 05:28PM
New Guru Scott Black has a specific set of criteria he looks for when selecting stocks for his Boston-based firm Delphi Management to invest in. He appeared on Bloomberg this morning to discuss what he describes as his “old Warren Buffett-style” process.
As an embarkation point, Black likes stocks that:
· Have over 14% return on equity
· Have a strong three-to-five-year record of earnings and revenue growth
· Have a P/B ratio under 2.5
· Are deleveraged
Here is the interview:
These are Black’s top five stocks and how they manifest these metrics: Berkshire Hathaway (BRK.B), Comcast Corp. (CMCSK), the Walt Disney Company (DIS), Oracle Corp. (ORCL) and CBS Corp. (CBS).
Berkshire Hathaway (BRK.B)
Black’s holding of Berkshire Hathaway dates back to the fourth quarter of 2009, when the average price was $67 per share, and he bought 106,750 shares. He has traded the stock numerous times since then, most recently adding 18,078 shares at an average price of $18.50 in the second quarter of 2012. The stock has increased 15% in the last five years.
Berkshire Hathaway’s return on equity at Black’s most recently reported purchase was 6.8%, lower than the 15% threshold he normally asks. In the last three years, the company has had strong revenue growth from $112.5 billion to $143.7 billion, and net income growth from $8.1 billion to $10.3 billion. Its P/B ratio was approximately within a range of 1.08 and 1.13. Berkshire Hathaway also has no long-term debt and $52.9 billion in long-term liabilities, a decrease from $111.8 billion at year-end 2011, and its lowest level since 2004.
Comcast Corp. (CMCSK)
Black purchased 494,883 shares at an average price of $15 when he initiated his position in the fourth quarter of 2009. Since then, he has bought and sold shares numerous times, most recently selling 23,193 shares at an average price of $29 in the second quarter of 2012. Comcast shares have advanced almost 49% in the last five years.
Comcast’s return on equity in the second quarter elevated to 11.2%, but was 8.5% when Black purchased it in 2009. In the last three years, its revenue increased from $35.6 billion to $55.9 billion, and net income increased from $3.6 billion to $4.3 billion. In the fourth quarter of 2009, when black originally purchased it, the stock’s P/B was on the rise from multi-year lows earlier that year. Its P/B range was approximately 1.64 in March to 2.25 in December. Comcast’s current P/B ratio is 3.91, a five-year high. Comcast has considerable debt, with a debt-to equity ratio of 0.83 in 2011, increased from 0.71 in 2010. In 2009, when Black established his position, however, the company had reduced its debt-to-equity ratio to 0.68, its lowest level in four years, from 0.80 in 2008.
The Walt Disney Company (DIS)
Black has also owned shares of Disney since the fourth quarter of 2009, paying $30 each for 165,146 shares, and bought and sold numerous times to date. Most recently, he sold 6,525 shares at an average price of $44.50 in the second quarter of 2012. Disney’s stock has risen almost 53% over the last five years.
Disney’s second-quarter return on equity increased to 17.4% from 14.4% the previous year, and a 10-year high. In 2009, when he established his position, Disney’s ROE had decreased to 9.8%, a four-year low, from 13.7% in 2008. In the last three years, Disney has grown revenue from $36.2 billion to $40.9 billion, and grown net income from $3.3 billion to $4.8 billion. Its five-year revenue growth rate is 5% and EBITDA growth rate is 5.7%.
Disney’s current P/B ratio is 2.2, close to a five-year high. When he first purchased in 2009, the stock’s P/B fell to a historical low of 0.92, though it rose as high as 1.8 by year-end. Disney has been reducing its debt-to-equity ratio over the last decade. In 2011, it was 0.35, its second-lowest year in the last ten. In 2009, it was 0.38, then its lowest level since 2002.
Black’s position in Oracle Corp. began in the fourth quarter of 2009, when he purchased 213,775 shares at an average price of $22. He has traded numerous times since then, adding to the position for the last five quarters, most recently purchased 49,857 shares in the second quarter at an average price of $28. Oracle’s price has increased almost 47% year to date.
Oracle Corp.’s ROE has been above 19% for all of the last ten years. It increased for the last three years to reach 22.6% in fiscal 2012. In the last three years, revenue increased from $26.8 billion to $37.1 billion, and earnings increased from $6.1 billion to $10 billion. Its five-year annual revenue per share growth rate is 16.6% and five-year annual EBITDA per share growth rate is 18.2%.
Oracle’s P/B ratio is currently 3.66, and it fell to a historical low 2.96 in May of this year. For fiscal 2012, Oracle had a debt-to-equity ratio of 0.31, its lowest since 2005. Prior to that, it remained at 0.37 for three years.
CBS Corp. (CBS)
Black initiated a position in CBS in the third quarter of 2011, buying 261,492 shares at an average price of $25. Most recently, he added 25,231 shares at an average price of $32 in the second quarter of 2012. CBS stock gained almost 74% in the last year.
In 2011, CBS’s return on equity jumped to 13.2% from 7.4% the previous year, and the first time ROE had reached the double digits in the decade. ROE has since increased to 16.9% as of the second quarter of 2012. In the last three years, the company’s revenue has increased from $13 billion to $14.3 billion, and net income increased from $227 million to $1.3 billion. Its five-year revenue per share annual growth rate is 2.1%, and five-year EBITDA per share growth rate is 0.
CBS’s P/B range in the quarter Black first purchased it, the third of 2009, was about 1.0 to 1.65. It has since risen to a historical high of 2.4 on a fairly steady increasing trend. CBS has been reducing its debt-to-equity ratio annually since 2008, and it fell to a 0.6 in 2011, its lowest level since 2008. It has been reducing its total liabilities annually since 2002.
For more of Black’s stock picks, see his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Scott Black.