Warren Buffett’s Possible Shopping List

Bloomberg published an interesting article today speculating what Mr. Buffett might buy in this market.

According to Berkshire's 2008 annual report, the shopping list criteria includes:

(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

And Bloomberg uncovered the following companies:

Aetna	Chubb	Kohl’s	Smith International
Aflac	Computer Sciences	Loews Corp.	Southern Copper
Agilent Technologies	Covidien	Marathon Oil	Southwestern Energy
Allergan	Danaher	McKesson	St. Jude Medical
Anadarko Petroleum	EOG Resources	Newmont Mining	Staples
Aon	General Dynamics	Noble Corp.	Sysco
Archer Daniels Midland	Halliburton	Noble Energy	TJX
Baker Hughes	Hess	Nucor	Union Pacific
Becton Dickinson	Illinois Tool Works	Precision Castparts	VF
Brown-Forman	Intercontinental Exchange	Raytheon	WellPoint
Bunge	Intuit	Reynolds American	W.W. Grainger
Cardinal Health	ITT	Rockwell Collins	Zimmer Holdings
Carnival		SAIC

In the article, it stated:

There are 50 U.S. companies with that much market value and profit, a return on equity exceeding 10 percent and a debt-to- equity ratio less than 50 percent...Sysco, VF and Danaher are also the sort of easy-to-understand businesses that Buffett favors.

Among the companies meeting the criteria, 12 have price-to- earnings multiples of no more than 7. They include Houston-based Marathon Oil Corp.; Aflac Inc., an insurer based in Columbus, Georgia; and steelmaker Nucor Corp. of Charlotte, North Carolina.

According to What Has Worked In Investing, published by Tweedy, Browne Company LLC, stocks with low p/e ratio have a higher probability in future price appreciation.

Low Price in Relation to Earnings -
Stocks bought at low price/earnings ratios afford higher earnings yields than stocks bought at higher ratios of price-to-earnings. The earnings yield is the yield which shareholders would receive if all the earnings were paid out as a dividend. Benjamin Graham recommended investing in companies whose earnings yield was 200% of the yield on AAA bonds. Investing in stocks that are priced low in relation to earnings does not preclude investments in companies whose earnings are expected to grow in the future. To paraphrase Warren Buffett, “value” and “growth” are joined at the hip. A company priced low in relation to earnings, whose earnings are expected to grow, is preferable to a similarly priced company whose earnings are not expected to grow. Price is the key. Included within this broad low price in relation to earnings category are high dividend yields and low prices in relation to cash flow (earnings plus depreciation expense).