Warren Buffett 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., DaVita Inc., Monsanto, American Express Co. and Apple.