While Warren Buffett is often thought of as a ‘value’ investor, if you take a closer look at his investment approach, you’ll find that he’s also very much a ‘quality’ investor.
In other words, he likes high-quality companies that generate consistent earnings, are highly profitable, and have strong balance sheets. So are there any Warren Buffett-type stocks in the FTSE 100? Let’s have a look.
A Buffett screen
To examine the FTSE 100 for high-quality stocks, I set up a basic quality screen with a number of common quality attributes. Specifically, I listed the following criteria:
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5-year average return on capital employed (ROCE) > 15%
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5-year annualised sales growth > 5%
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5-year annualised operating cash flow growth > 5%
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Current ratio > 1.5
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Number of consecutive dividend payments > 5
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Long-term debt to equity < 50%
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Index: FTSE 100
I’ll point out this is just a basic quality screen. I could certainly have added more criteria. Yet I figured it would give me a good indication of companies that are growing, are profitable, and are financially sound. Here are the FTSE 100 companies the screen generated:
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3i Group
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Hargreaves Lansdown
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Croda International
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Persimmon
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Taylor Wimpey
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Berkeley
So would Buffett invest in any of these six names?
FTSE 100 Buffett-style stocks
In my view, the two companies he would be most likely to go for are Hargreaves Lansdown (LSE: HL) and Croda International (LSE: CRDA). I think he’d be less inclined to go for the three housebuilders and 3i because they’re more cyclical. For example, all four of these companies slashed their dividends dramatically during the Global Financial Crisis.
Hargreaves Lansdown is certainly a stock I think Buffett might be interested in. In fact, Nick Train, who is often referred to as ‘Britain’s Warren Buffett’, is a big fan of the stock and has a large position within his UK Equity Fund.
Hargreaves is not a particularly cheap stock, but it does tick a lot of boxes from a quality investing perspective. For example, it has generated consistent growth over the last decade and ROCE has averaged 81% over the last five years, which indicates the company is highly profitable.
Interestingly, Hargreaves shares have taken a whack this month over the Neil Woodford debacle and are down over 20%. I wonder if that could get Buffett interested? The phrase “be fearful when others are greedy and greedy when others are fearful” comes to mind.
Croda – an under-the-radar company that makes specialty chemicals for a number of industries including cosmetics, healthcare, and farming – is another high-quality company that might interest Buffett.
The stock has been a fantastic performer in recent years and has smashed the returns from the FTSE 100. Moreover, it’s now registered 20 consecutive dividend increases which is an excellent achievement and the sign of a top-quality company, and also recently paid out a huge special dividend to shareholders.
Like Hargreaves Lansdown, Croda shares are not particularly cheap. Currently, the stock trades on a P/E ratio of 25.6 and the dividend yield is just over 2%. If Buffett was interested in the stock, I think he might be inclined to wait until a more attractive buying opportunity presented itself, given that he loves value too.
