Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) underscored four key criteria to investing in a significantly overvalued stock market, including predictable earnings and strong profit margin growth. The top five predictable companies in Buffett’s portfolio are Torchmark Corp. (TMK, Financial), Costco Wholesale Corp. (COST, Financial), VeriSign Inc. (VRSN, Financial), Moody’s Corporation (MCO, Financial) and DaVita Inc. (DVA, Financial).
Torchmark
Torchmark provides various plans and policies through its Life Insurance and Health Insurance business segments. GuruFocus lists two positive investing signs for the McKinney, Texas-based company: consistent revenue growth and a price-earnings ratio near a five-year low. Additionally, the company’s return on equity is near a 10-year high of 27.63% and outperforms 97% of global competitors.
Torchmark made the undervalued predictable screener as its margin of safety based on the discounted earnings model is 63.51%.
Buffett has not released his third-quarter portfolio as the deadline is 45 days after quarter-end. As of the second quarter, Berkshire owns 6,353,727 shares of Torchmark.
Costco
Issaquah, Washington-based Costco offers its members low prices on various nationally branded and select private-label products in merchandise categories. The company reported net sales of $43.4 billion for the quarter ending Sept. 2, up 5% from the $41.4 billion from the prior-year quarter.
GuruFocus ranks Costco’s profitability 7 out of 10: even though the company’s operating margin outperforms just 53% of global competitors, net profit margins of 2.16% are still near 10-year highs.
Buffett owns 4,333,363 shares of Costco as of the second quarter. Other gurus with large positions in Costco include Spiros Segalas (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
VeriSign
Reston, Virginia-based VeriSign provides domain name registry and internet security for websites and enterprises around the world. GuruFocus ranks the company’s profitability a perfect 10, driven by a strong Piotroski F-score of 8 and returns on assets that outperform 89% of global competitors. Additionally, VeriSign’s operating margin has increased approximately 3% per year over the past five years and is outperforming 98% of global competitors.
VeriSign’s business predictability ranks four stars out of five, suggesting strong and consistent revenue and earnings growth over the past 10 years.
Moody’s
New York-based Moody’s publishes credit ratings and research reports on fixed-income securities. GuruFocus ranks the company’s profitability 8 out of 10, primarily due to consistent revenue growth, expanding operating margins and a Joel Greenblatt (Trades, Portfolio) return on capital that outperforms 89% of global competitors.
Moody’s business predictability ranks 3.5 stars out of five, suggesting consistent revenue and earnings growth over the past 10 years.
DaVita
Denver-based DaVita operates and provides related lab services for kidney dialysis centers. The company’s profitability ranks 8 out of 10 primarily due to a strong Piotroski F-score of 7 and returns on equity that outperform 71% of global competitors.
GuruFocus placed DaVita’s 3.5-star predictability rank on watch as the company’s revenue has declined approximately 1.2% per year over the past three years, a rate that underperforms 78% of global competitors.
See also
Other predictable companies in Buffett’s portfolio include United Parcel Service Inc. (UPS, Financial), Apple Inc. (AAPL, Financial) and Southwest Airlines Co. (LUV, Financial). The three companies have predictability ranks 3, 2.5. and 2.5.
Disclosure: As of this writing, the author is long Costco.
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