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James Li
James Li
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3 Predictable Stocks Warren Buffett and Ray Dalio Agree On

Bridgewater co-CIO has holdings in line with Buffett’s 'good companies' strategy

According to Aggregated Portfolio Statistics, Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates have several holdings in common, including three stocks with a GuruFocus business predictability rank of at least three stars: Southwest Airlines Co. (NYSE:LUV), Moody’s Corp. (NYSE:MCO) and DaVita Inc. (NYSE:DVA).

"Oracle of Omaha" underscores the importance of business predictability

Buffett, a protégé of the legendary Benjamin Graham, celebrated his 89th birthday last Friday. The “Oracle of Omaha” and Charlie Munger (Trades, Portfolio), co-managers of the Omaha, Nebraska-based conglomerate, detailed four investing criteria for good companies at fair prices: understandable business, predictable earnings, economic moat and reasonable price.

GuruFocus established a “business predictability rank” that captures the strength and consistency of a company’s revenue and earnings growth over the past 10 years. Companies that have shown strong and consistent revenue and earnings growth earn ranks of four stars or higher; such companies are defined as predictable companies.

The “predictability chart” contains two financial series: revenue per share and Ebitda per share. Figure 1 shows the predictability chart for Berkshire holding Amazon.com Inc. (NASDAQ:AMZN), a company with a four-star predictability rank.

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Figure 1

As Figure 1 illustrates, Amazon.com’s revenue and earnings growth rate appear consistent as the bars line up with the trendlines.

As of June quarter-end, Berkshire’s $208.1 -billion equity portfolio contained 47 stocks, with 47.18% weight in financial services and 25.71% weight in technology.

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Dalio builds Bridgewater through his “Principles”

Dalio, co-chairman and co-chief investment officer of Bridgewater, founded the Greenwich, Connecticut-based hedge fund and invests based on principles like working for what he wants and coming up with the best independent options and stress-testing them. While the hedge fund has over $165 billion in assets under management, the value of Bridgewater’s equity holdings is $12.75 billion as of second quarter-end, with over 78% weight in exchange-traded fund holdings. Among the stock market sectors, the top three represented are consumer cyclical, financial services and energy, with weights of 4.86%, 2.90% and 2.79%.

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Southwest Airlines

Berkshire and Bridgewater have a combined weight of 1.33% in Southwest. Buffett’s conglomerate owns 53,649,213 shares, while Dalio’s hedge fund owns 57,617 shares.

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The Dallas-based airline operates a point-to-point network of short-haul flights using approximately 700 aircraft manufactured by Boeing Co. (NYSE:BA). GuruFocus ranks Southwest’s profitability 8 out of 10 on several positive investing signs, which include operating margins that have increased approximately 11.30% per year on average over the past five years and are outperforming 86.67% of global competitors.

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Southwest’s business predictability ranks a perfect five stars as the company has strong and predictable earnings growth over the past 10 years. With a price-earnings-to-growth ratio of 0.59, Southwest is one of the top stocks on the Buffett-Munger Screener due to the high business predictability and strong margin growth.

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Other gurus riding Southwest’s profitability include PRIMECAP Management (Trades, Portfolio) and the T Rowe Price Equity Income Fund (Trades, Portfolio).

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Moody’s

Berkshire and Bridgewater have a combined weight of 2.32% in Moody’s. Buffett’s conglomerate owns 24,669,778 shares, while Dalio’s hedge fund owns 3,177 shares.

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The New York-based company publishes credit opinions, research and ratings on fixed-income securities, issuers of securities and other credit obligations. GuruFocus ranks the company’s profitability 9 out of 10 on several positive indicators, which include expanding profit margins and a return on equity that outperforms 99% of global competitors. Despite this, Moody’s’ 4.5-star predictability rank is on watch as revenues have decelerated over the trailing 12 months.

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DaVita

Berkshire and Bridgewater have a combined weight of 1.09% in DaVita. Buffett’s conglomerate owns 38,565,570 shares, while Dalio’s hedge fund owns 112,963 shares.

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The Denver-based company provides dialysis, a kidney process referred to as renal replacement therapy. GuruFocus ranks DaVita’s profitability 7 out of 10: Even though the company’s return on assets underperform 94% of global competitors, its operating margin has increased approximately 1.20% per year over the past five years and is outperforming 61.09% of global competitors.

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DaVita’s predictability ranks just three stars, i.e., slightly short of Buffett and Munger’s criteria of four stars. Despite this, GuruFocus’ Good Companies Screen and Peter Lynch Growth Screen, some of our predefined screens we offer within our All-in-One Screener, require a predictability rank of just two stars.

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As the above chart suggests, DaVita’s predictability ranks just three stars as Ebitda per share declined over the trailing 12 months even though the company has consistent revenue growth.

Disclosure: Long Southwest.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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