"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," Warren Buffett (Trades, Portfolio) famously said in his 1989 letter to the shareholders of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
This quote had achieved widespread popularity because, as many value investors have found out the hard way, it can be all too easy to fall into the trap of thinking a stock is a good bargain simply because it is cheap. However, that is not the case – it is just as common for a cheap stock to deserve its low valuation due to poor business prospects, unsustainable leverage or some other consideration.
Based on this famous quote from Buffett, GuruFocus developed the Buffett-Munger Screener, a Premium feature that screens for stocks based on the following criteria:
- A high business predictability rank (indicating they can consistently grow revenue and earnings).
- Competitive advantages (which allow it to maintain or even expand the profit margin).
- Low debt despite high growth.
- Fair or low valuations using PEPG as an indicator (PEPG is the price-earnings ratio divided by the average growth rate of Ebitda over the past five years).
According to the Buffett-Munger Screener as of Jan. 22, the following three companies meet the above criteria. They also have positive revenue and earnings estimates from Morningstar analysts, meaning they are expected to continue growing in the years ahead.
J2 Global
One company that meets the Buffett-Munger Screener criteria is J2 Global Inc. (JCOM, Financial), an American internet services company that operates through two segments: Business Cloud Services and Digital Media.
On Jan. 22, shares of the company traded around $97.43 for a market cap of $4.36 billion. J2 Global has a business predictability rank of five out of five stars, a five-year Ebitda growth rate of 14.40%, a price-earnings ratio of 21.74 and a PEPG ratio of 1.51.
The company reported revenue of $1.37 billion and earnings per share of $4.39 in 2019. Morningstar analysts estimate it will post revenue of $1.45 billion for 2020, followed by $1.64 billion in 2021. Earnings per share are expected to decline to $4.06 in 2020 but rise to $7.52 in 2021.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 10 out of 10. While the cash-debt ratio of 0.36 is lower than 83% of competitors, the Altman Z-Score of 2.29 indicates the company is not likely in danger of bankruptcy. The return on invested capital is consistently higher than the weighted average cost of capital, meaning the company is creating value.
Ken Fisher (Trades, Portfolio) is the top guru shareholder of the company with 0.46% of shares outstanding, followed by Chuck Royce (Trades, Portfolio) with 0.42% and Paul Tudor Jones with 0.15%.
Amgen
California-based Amgen Inc. (AMGN, Financial), one of the world's largest independent biopharmaceutical companies, also meets the criteria for the Buffett-Munger Screener. The company's research and development are focused on treatments for leading causes of death and disability.
On Jan. 22, shares of the company traded around $253.50 for a market cap of $147.67 billion. Amgen has a business predictability rank of five out of five stars, a five-year Ebitda growth rate of 11.80%, a price-earnings ratio of 20.54 and a PEPG ratio of 1.74.
The company reported revenue of $23.36 billion and earnings of $12.88 per share in 2019. Morningstar analysts estimate it will post revenue of $25.34 billion for 2020, followed by $26.39 billion in 2021. Earnings per share are expected to decline to $11.80 in 2020, but rise to $13.63 in 2021.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10. The interest coverage ratio of 7.37 is on the low end of the spectrum, but the Piotroski F-Score of 6 out of 9 is typical of a financially stable company. The operating margin of 41.41% and net margin of 33.57% are outperforming 95% of industry peers.
PRIMECAP Management (Trades, Portfolio) is the company's top guru shareholder with 2.99% of shares outstanding, followed by Pioneer Investments (Trades, Portfolio) with 0.22% and Jim Simons (Trades, Portfolio) with 0.10%.
Lithia Motors
Lithia Motors Inc. (LAD, Financial), an automotive retailer, also makes the Buffett-Munger Screener list. One of the largest automotive group retailers in the U.S. (and number one in terms of growth), Lithia Motors offers 28 brands of new vehicles and all brands of used cars in its stores and online.
On Jan. 22, shares of the company traded around $338.03 for a market cap of $8.97 billion. Lithia Motors has a business predictability rank of five out of five stars, a five-year Ebitda growth rate of 20.30%, a price-earnings ratio of 22.23 and a PEPG ratio of 1.09.
The company reported revenue of $12.67 billion and earnings of $11.60 per share in 2019. Morningstar analysts estimate it will post revenue of $12.97 billion for 2020, followed by $16.38 billion in 2021. Earnings per share are expected to increase to $17.48 in 2020 and $19.21 in 2021.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The interest coverage ratio of 5.31 is lower than the industry median of 6.32, but the Altman Z-Score of 3.84 indicates the company is not in danger of bankruptcy. The ROIC has surpassed the WACC in recent years, indicating a turn to profitability.
The top guru shareholders of the company are David Abrams (Trades, Portfolio) with 8.39% of shares outstanding, Chuck Royce (Trades, Portfolio) with 0.13% and Steven Cohen (Trades, Portfolio) with 0.13%.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
Read more here:
- Intel Shares Rise on Strong 4th-Quarter Results
- Strategies to Stay Ahead in a Market Bubble
- Bank of America Shows an Optimistic Outlook on 4th-Quarter Results
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
