Warren Buffett Likes the Stocks in Buffett-Munger Screener: ADM, GD

Warren Buffett said on Bloomberg TV this morning that he may look at Archer Daniels Midland Co. (ADM, Financial) as Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) seeks more acquisitions. General Dynamics Corp. (GD, Financial) and Exelon Corp. (EXC, Financial) are also the types of companies he finds attractive. Interestingly, out of the three companies he mentioned, two of them, Archer Daniels Midland Co. and General Dynamics Corp., are listed at the top of GuruFocus Buffett-Munger screener. As of today, Archer Daniels Midland is No. 4 in the screener, and General Dynamics is at No. 8.

Archer Daniels Midland Company is a world leader in agricultural processing and fermentation technology. ADM is one of the world's largest processors of soybeans, corn, wheat and cocoa. GuruFocus ranks the business predictability of ADM 4.5-star. It is now traded at a P/E ratio of 9.4. Our fair value calculation gives a margin of safety of more than 60%. Defense contractor General Dynamics is also ranked 4.5-star in predictability and traded at 60% discount.

GuruFocus developed the Buffett-Munger screener to find the companies that Warren Buffett and Charlie Munger would buy. They are high-quality business at undervalued or fair-valued prices:

1. Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
2. Companies that have competitive advantages. They can maintain or even expand its profit margin while growing its business.
3. Companies that incur little debt while growing business.
4. Companies that are fair valued or under-valued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past five years.

From the back testing study from 1998-2008 we have found strong correlations between the Predictability of Businesses and the long-term return of stocks. The group of undervalued highly predictable companies performed the best. This group had an annualized gain of 20%, while the market just averaged 2.7% a year. See What Worked in the Market from 1998-2008? Part II. Under-Valued Predictable Companies and Buffett-Munger Screener

In order to further observe the performance of the screener, GuruFocus started a Buffett-Munger model portfolio in January 2009. The model portfolio is composed of the top 25 stocks in the Buffett-Munger screener and rebalanced once a year. The portfolio gained 27% in 2009, 21.1% in 2010, and 17.1% year to date. The cumulative gain of the past two and half years is 80%, outperforming the market by 30%. All numbers do not include dividends. The details of the current portfolio are here.

GuruFocus also publishes a Buffett-Munger monthly newsletter which provides in-depth analysis of one of the stocks in the Buffett-Munger screener. The latest issue is here.

Two of the three stocks that Buffett likes today are in the Buffett-Munger screener we developed. This is truly something to be proud of.

In the meantime, if you are not a premium member of GuruFocus, we invite you for the 7-day Free Trial to check out the Buffett-Munger Screener and download the latest Buffett-Munger Newsletter.