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Holly LaFon
Holly LaFon
Articles (8057) 

Warren Buffett’s 5 Highest-Quality Companies

Higher quality corresponds with higher return

Warren Buffett (Trades, Portfolio) preaches the “high-quality, fair-price” theory of value investing. Buying good companies with reasonable price tags has been more profitable for him, he has said, than his earlier approach of trying to find fair companies cheap. His portfolio, therefore, should showcase a host of these. But which are the best?

One strong indicator of “high quality” in describing a business is having predictable and proven earnings. A study proves that Buffett’s better returns from these companies were not unique to him. For the years 1998-2008, companies with high earnings predictability outdid lesser companies, according to a backtest of GuruFocus data. Those with a predictability rank of five stars produced a 12.1% return, while those considered one-star returned 1.1%. For all rankings, each one-half demotion correlated with lower returns, at seen in the chart below.

The highest-rated stocks in Buffett’s portfolio are: Costco Wholesale Corp. (NASDAQ:COST), DaVita Inc. (NYSE:DVA), Monsanto (NYSE:MON), American Express Co. (NYSE:AXP) and Apple (NASDAQ:AAPL).

Costco

Costco, the low-cost retailer, has the highest business predictability of Buffett’s portfolio: five stars. Over the past 10 years, it has grown EBITDA at a 9.5% annual rate. Its share price in the same period rose 175.3%.

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Buffett owns 4,333,363 shares of Costco, which is 0.45% of his portfolio. The value of the holding is $726.7 million.

DaVita

DaVita, the kidney dialysis company, has the second highest predictability rating, at 4.5 stars. Its 10-year EBITDA growth rate is 10.6%. In 10 years, its stock gained 141.5%.

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Ted Weschler, rather than Buffett, bought DaVita for Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)’s portfolio. He has amassed 38,565,570 shares of the company, equivalent to 1.62% of the portfolio. The value of the holding is $2.62 billion.

Monsanto

Monsanto, the seed and fertilizer company, has a predictability rank of 3.5 stars. Its EBITDA increased at a rate of 5.4% over the past 10 years. Its stock rose 73.23% in the same time.

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Berkshire holds 8,041,784 shares of Monsanto, worth 0.56% of the portfolio. The value of the holding is $910.33 million.

American Express

American Express, the credit card company, also ranks 3.5 stars on the predictability scale. Its stock advanced 33.1% in the past 10 years, while EBITDA grew at a 10.1% rate.

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Berkshire has purchased 151.61 million American Express shares. American Express composes 7.41% of the company’s portfolio and is valued at $11.99 billion.

Apple

Apple, the tech and iPhone company, has a three-star predictability ranking. The EBITDA of Apple increased at a rate of 42.5% over the past 10 years. Apple stock rose 732.56% for the decade.

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Berkshire owns 18.58 million Apple shares, giving it 11.48% portfolio space. The Apple stake is worth $18.58 billion.

To see more Warren Buffett (Trades, Portfolio) high-quality companies, go here.


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