Four companies from Warren Buffett (Trades, Portfolio)’s current portfolio offer good growth and value potential for the second half of the year: Proctor & Gamble Co. (PG, Financial), Sirius XM Holdings Inc. (SIRI, Financial), Sanofi SA (SNY, Financial) and VeriSign Inc. (VRSN, Financial).
Setting up the portfolio
I first created a portfolio containing 300 shares of each company Buffett owned as of March 31. The date added for each transaction is April 3, the first trading day of the second quarter. I then loaded this portfolio into the All-In-One Guru Screener and selected the following three filters:
- A Piotroski F-score of at least 7.
- A positive operating margin growth rate.
- A gross margin of at least 40%.
Four of Buffett’s 49 stock holdings met all three criteria as of June 23: P&G, Sirius XM, Sanofi and VeriSign.
Proctor & Gamble
Cincinnati-based Proctor & Gamble markets popular brands through an eclectic variety of retailers including grocery stores like The Kroger Co. (KR, Financial) and membership club stores like Walmart Stores Inc.’s (WMT, Financial) Sam’s Club and Costco Wholesale Corp. (COST, Financial). Despite backdrops in “geopolitical disruptions and foreign exchange challenges,” P&G reported “modest organic sales growth and double-digit Core EPS growth” during the quarter ending March 31, according to CEO David Taylor.
Even though P&G’s profitability ranks a modest 5 out of 10, the company’s margins and returns are near a 10-year high and outperform over 88% of global competitors. The company’s Piotroski F-score ranked at least 7 during the past five quarters, driven by consistent increases in ROA, gross margin and asset turnover.
P&G expects full-year earnings to increase 48% to 50% from prior-year earnings of $3.69. This year’s expected earnings include a $1.95 gain from divesting 41 Beauty Brands products to Coty Inc. (COTY, Financial).
Sirius XM, a popular U.S. satellite company, broadcasts music, sports and other entertainment channels through its proprietary satellite radio systems. The company has good profitability albeit poor financial strength.
Sirius reported solid first-quarter results including a 20% year-over-year increase in net income and a 14% year-over-year increase in adjusted earnings. The New York broadcasting company added 259,000 net new self-pay subscribers and boosted its average revenue per user (ARPU) 2.3% during the quarter. These results contributed to operating margins and returns on assets that outperform 94% and 85% of global competitors. Sirius’ consistent gross margin and asset turnover growth contributed to high Piotroski F-scores during the past 10 quarters.
French oncology manufacturer Sanofi offers a diverse array of drugs with concentrations in cardiovascular disease, diabetes and various vaccines. The company reported solid first-quarter results, including an 11.1% increase in net sales, a 7.6% in business operating income and a 6% increase in business earnings. These results contributed to a profitability rank of 7, suggesting good short-term growth potential.
CEO Olivier Brandicourt praised Sanofi’s management team for delivering “robust [company] growth driven by Specialty Care and Vaccines as well as good performance in emerging markets.” Sanofi made good progress on its long-term strategic roadmap including the U.S. launch of Dupixent® for “moderate-to-severe atopic dermatitis,” a “devastating disease,” according to the CEO.
Sanofi and New York-based Regeneron Pharmaceuticals Inc. (REGN, Financial) reported positive results from their first dedicated studies on Praluent®, a drug that “significantly reduced low-density lipoprotein cholesterol (LDL-C)” and helped reduce nonhigh-density lipoprotein cholesterol (non-HDL-C) in patients. These results contributed to strong operating margins for both companies with Sanofi generating an 18.83% margin and Regeneron producing a 28.76% margin. Both companies’ margins outperformed the industry-median margin during the past three years.
Online media company VeriSign provides domain name registry and internet security for Web sites and enterprises around the world. The company has good profitability even though the company’s financial strength ranks a poor 3 out of 10. VeriSign also has a business predictability rank of a solid three stars out of five.
VeriSign reported good first-quarter results including a 2.4% increase in net revenues from the prior-year quarter. Domain name registrations increased by 1.4 million during the quarter, representing a 1% increase from first-quarter 2016.
The company reported a 60.7% operating margin during the quarter, outperforming the prior-year quarter margin by approximately 1.5%. VeriSign’s five-year operating margin growth rate is a high 5.90%.
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Disclosure: The author does not have positions in the stocks mentioned.