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Combs gave a talk a year ago at Columbia Business School, and discussed how he and Buffett approach investments.

While the talk was off-the-record, there was at least one detailed account posted on the Internet. Combs reportedly said that he regularly meets with Buffett and they talk about stocks. Buffett asks what companies in the S&P 500 were trading for 15 times forward earnings, and how many can expand earnings at 7% annually over the next five years with a reasonable degree of confidence.

https://www.barrons.com/articles/warren-buffett-be... - subscription required.

What are the best picks currently using this screen?

Link to Comb's speech at Columbia Dec 2022 Graham Dodd breakfast.

https://www.valueresearchonline.com/stories/51874/...

That 7% growth rule is doing a lot of analytical work in the screen. Easier for Buffett, I'm sure, but a very hard ask for mere mortals.

As a poor proxy, I had a glance at S & P 500 companies with a forward P/E under 15, and that have (1) EPS growth in this year of 5%+, (2) projected EPS growth next year of 5%+, and a nominal 5 year growth rate over the past 5 years in excess of 20%.

My screen spit out twelve names:

TPR (Tapestry)
HIG (Hartford)
RL (Ralph Lauren)
VICI (REIT/casinos)
FSLR (First Solar)
WRB (WR Berkley)
HCA (HCA Healthcare)
AXP (Amex)(I own some, not just via BRK, and am kicking myself for not adding more with the last drop)
TXT (Textron)
ULTA (Ulta Beauty)
NI (NiSource)
MCK (McKesson)

Same screen restricted to NASDAQ 100 nets zero. 89 in total without the S & P 500 index restriction.

That 7% growth rule is doing a lot of analytical work in the screen. Easier for Buffett, I'm sure, but a very hard ask for mere mortals.

Indeed.
The thing is you want that growth even in the "pretty darned bad" scenarios, which means you have to understand the business well enough to understand what the various outcomes might be, and their probabilities.
So all you can do with a database is create plausible nominees.

But, FWIW, here is a list which meets all the following criteria, as a hunting ground.
* In the ~1600 stocks currently covered by Value Line
* EPS growth last 5 years > 7%
* Forecast EPS growth next 3-5 years > 7%
* Earnings yield indicates P/E < 15, using ALL of the following: trailing EPS, "current" EPS, forward EPS, est current fiscal EPS, and est next fiscal EPS.

Sorted in decreasing order of lowest of those earnings yields. i.e., "cheapest" first.
There are 147 of them.
This is done using data from Friday before last.

There are two lists below. First one is 147 stocks as described. Way down at the bottom is the same list, but requiring >11% trailing and forward EPS growth rates---think of that as 7%/year growth plus 4%/year inflation. There are 56 of them.

ABG
TOL
TGNA
DINO
GPI
EWBC
PHM
WBS
AN
RF
TS
CNHI
HWC
MTG
TEX
DDS
ASIX
HBAN
ONB
MFC
ALLY
ARCH
ALSN
GES
NMIH
BERY
AGCO
BC
HPQ
SANM
FCF
ARW
BLDR
WCC
AXS
AMG
OXM
BYD
JPM
AMWD
DVN
HRI
DKS
DAR
VSH
OC
NA.TO
STM
MET
OLN
CFR
OVV
SWN
HIG
BABA
FMC
MPLX
PLAB
WKC
SU.TO
TKR
CLS
WES
URI
AFG
CMCSA
DOOR
JACK
SON
STLD
ATSG
CNC
IMO
FTT.TO
EXP
CMCO
FLEX
TRP
ADM
SSNC
IART
HI
TTMI
MKL
AIG
TD.TO
RUSHA
GL
CVX
GHC
SLGN
DE
FRO
SEE
LKQ
G
MCHP
SF
IPG
WEX
RRX
CMI
BLD
RS
AVNS
SPH
SHEL
CHTR
MS
AMP
HCA
IBP
NTAP
TRU
AMKR
TECKB.TO
CAT
NXPI
DIOD
BOOT
LOW
MCRI
ACGL
CI
ELV
AMX
FLT
SNA
EPC
AFL
BECN
GPC
LUN.TO
EBAY
PRI
WRB
PYPL
SEM
SIRI
VMI
IBKR
ALLE
KEYS
TGT
KMI
SEDG
AWI


Second list, 56 stocks requiring 11%/year trailing and forward estimate EPS growth rates
TOL
DINO
GPI
AN
TS
CNHI
TEX
ALSN
GES
NMIH
BLDR
WCC
BYD
HRI
DAR
OC
STM
OVV
SWN
PLAB
WKC
SU.TO
URI
DOOR
IMO
FTT.TO
TRP
MKL
CVX
DE
G
SF
WEX
RRX
BLD
AVNS
SPH
SHEL
CHTR
AMP
IBP
CAT
MCRI
ACGL
CI
ELV
FLT
EPC
LUN.TO
PRI
WRB
PYPL
SIRI
VMI
KMI
SEDG

Buffet's interest in growth was forward looking
"trading for 15 times forward earnings, and how many can expand earnings at 7% annually over the next five years with a reasonable degree of confidence."

Jim's screen included a criterion of EPS growth over last 5 years > 7%.

One can argue that earnings are unlikely to grow over the next 5 years if they haven't grown over the past 5 years, but that wasn't the Buffet prescription. If he wanted to look at growth over the past 5 years, he would have said so (maybe he did, it's not like we have a recorded conversation).

Just a thought:
If one posits that a past earnings growth criterion is useful in lieu of being able to project future earnings growth like Buffet can, then maybe one should also add a past return criterion? There's an implicit assumption in all this that solid earnings growth over a reasonably long period, e.g. 5 years, will more likely than not be associated with a solid return. So if one is going "ex-Buffet" and including a criterion that past earnings growth be very healthy, then maybe one should also add a criterion that the past return over the period be very healthy too, i.e. "Inflation + X%". Pick your "X".

Jim's screen included a criterion of EPS growth over last 5 years > 7%.

One can argue that earnings are unlikely to grow over the next 5 years if they haven't grown over the past 5 years, but that wasn't the Buffet prescription. If he wanted to look at growth over the past 5 years, he would have said so


Jim did include past EPS growth as a criterion, but he also used Value Line's prediction of eps growth in the next 3-5 years:

* EPS growth last 5 years > 7%
* Forecast EPS growth next 3-5 years > 7%

Buffett is famously not interested in investing in turnarounds, so I suspect that he would agree that if you haven't had solid eps growth over the last 5 years, you're not a very good candidate for having reliable future eps growth, either. The greater problem is that Value Line is almost certainly not as good as Buffett at predicting that future growth. But it's better than nothing, unless we want to do the Buffett/Combs exercise ourselves.

Which we could do.

Here's one that I think fits pretty well, maybe others could add to the list: IBKR, current share price $80. Trailing P/E 14.66, forward P/E 13.18, historical earnings per share in the last 7 years are $5.50, $3.75, $3.24, $2.42, $2.10, $2.28, $1.07, $1.25 and $0.78 (easily besting the 7% criterion or Jim's more stringent 11% criterion), annual client equity growth of 20% over the last 5 years (and at similar levels for much longer period than that), improving margins (they are heavily automated, so new clients do not require commensurate new spending), conservatively managed, strong balance sheet, strong moat (being heavily automated, they are a low-cost provider; their overall cost to investors is unbeatable, if you include interest rates paid on balances, low commissions, low cost forex, etc.) It's a bit on the small side for Buffett (market cap $34b, of which 3/4 is owned by management, mostly by the founder, Thomas Peterffy.)

I just bought a few more shares, it's my #3 position after Fairfax. (Fairfax could be on the list too.) But it would be lovely to see other ideas of stocks people are familiar with that fulfill the Buffett/Combs watercooler criteria.

dtb

IBKR does look extremely interesting, thanks for pointing it out.

My remark about WEB being future-focused whereas we tend to turn more to past stats didn't mean to ignore Jim's use of forward EPS. But they are projections by people who aren't Buffet. Maybe in aggregate they're useful, that's testable.

My general concern is this:
Are we capitivated by the shiny object of easily available past data so we get very quantitative on this because this is relatively easy for us to do, but as a consequence we pay less attention than Buffet does to estimating, somehow (!), well into the future? MI used screens that seemed to be utterly logical screens of past data, but the picks too often failed going forward. Including future EPS projections by analysts might, or might not, be useful, that can be tested. I speculate a bit on doing something other than pure 'quant' at the end of this post.

Back to Jim's suggestion: I had suggested adding in past share price performance as a criterion, because if you're thinking that growth in EPS augurs well for the future then that idea should also be checked on past data. FWIW, below is the past five year CAGRs of the final 56 firms in Jim's post. I take 'five years' as the start of 2019 to present i.e. almost to end of 2023, so almost five years. The three Toronto exchangs tickers will have to be included later if of interest because the ".TO" threw off my script.

Bottom line: if you ask that the firms had to do at least as well as BRK over the past five years in terms of CAGR (maybe you don't want to demand that?) then these firms are ruled out:

DINO, CNHI, ALSN, GES, NMIH, WKC,TRP, MKL, CVX, G, WEX, RRX, AVNS, SPH, SHEL,CHTR , CI, FLT, EPC, PYPL, SIRI, KMI

I include BRK and SPY for reference:

                          BRK
Annualized Return              0.1150000
Annualized Std Dev             0.2204000
Annualized Sharpe (Rf=0%)      0.5218000
maxDrawdown                    0.2956994
                          SPY
Annualized Return            0.1403000
Annualized Std Dev           0.2121000
Annualized Sharpe (Rf=0%)    0.6611000
maxDrawdown                  0.3371727
                          TOL
Annualized Return             0.215900
Annualized Std Dev            0.485600
Annualized Sharpe (Rf=0%)     0.444600
maxDrawdown                   0.719797
                          DINO
Annualized Return             0.0371000
Annualized Std Dev            0.5101000
Annualized Sharpe (Rf=0%)     0.0727000
maxDrawdown                   0.6921351
                          GPI
Annualized Return            0.4099000
Annualized Std Dev           0.5336000
Annualized Sharpe (Rf=0%)    0.7681000
maxDrawdown                  0.7024853
                          AN
Annualized Return            0.314000
Annualized Std Dev           0.433900
Annualized Sharpe (Rf=0%)    0.723800
maxDrawdown                  0.574448
                          TS
Annualized Return           0.1254000
Annualized Std Dev          0.4274000
Annualized Sharpe (Rf=0%)   0.2933000
maxDrawdown                 0.6873873
                          CNHI
Annualized Return             0.0380000
Annualized Std Dev            0.4083000
Annualized Sharpe (Rf=0%)     0.0930000
maxDrawdown                   0.5585198
                          TEX
Annualized Return            0.1325000
Annualized Std Dev           0.4903000
Annualized Sharpe (Rf=0%)    0.2702000
maxDrawdown                  0.6456199
                          ALSN
Annualized Return             0.0542000
Annualized Std Dev            0.3233000
Annualized Sharpe (Rf=0%)     0.1676000
maxDrawdown                   0.4709926
                          GES
Annualized Return            0.0514000
Annualized Std Dev           0.8695000
Annualized Sharpe (Rf=0%)    0.0591000
maxDrawdown                  0.8331915
                          NMIH
Annualized Return             0.0981000
Annualized Std Dev            0.4700000
Annualized Sharpe (Rf=0%)     0.2087000
maxDrawdown                   0.7306719
                          BLDR
Annualized Return             0.6519000
Annualized Std Dev            0.5273000
Annualized Sharpe (Rf=0%)     1.2362000
maxDrawdown                   0.6220724
                          WCC
Annualized Return            0.2424000
Annualized Std Dev           0.5150000
Annualized Sharpe (Rf=0%)    0.4707000
maxDrawdown                  0.7371229
                          BYD
Annualized Return            0.2372000
Annualized Std Dev           0.5348000
Annualized Sharpe (Rf=0%)    0.4436000
maxDrawdown                  0.7743236
                          HRI
Annualized Return            0.3711000
Annualized Std Dev           0.6173000
Annualized Sharpe (Rf=0%)    0.6012000
maxDrawdown                  0.7475689
                          DAR
Annualized Return             0.180200
Annualized Std Dev            0.427100
Annualized Sharpe (Rf=0%)     0.422000
maxDrawdown                   0.539688
                          OC
Annualized Return           0.2552000
Annualized Std Dev          0.3950000
Annualized Sharpe (Rf=0%)   0.6461000
maxDrawdown                 0.5422821
                          STM
Annualized Return            0.2591000
Annualized Std Dev           0.4509000
Annualized Sharpe (Rf=0%)    0.5745000
maxDrawdown                  0.4993788
                          OVV
Annualized Return            0.1252000
Annualized Std Dev           0.7493000
Annualized Sharpe (Rf=0%)    0.1670000
maxDrawdown                  0.9409856
                          SWN
Annualized Return            0.1465000
Annualized Std Dev           0.6506000
Annualized Sharpe (Rf=0%)    0.2251000
maxDrawdown                  0.7385892
                          PLAB
Annualized Return             0.1563000
Annualized Std Dev            0.4934000
Annualized Sharpe (Rf=0%)     0.3169000
maxDrawdown                   0.4735873
                          WKC
Annualized Return            0.0021000
Annualized Std Dev           0.4973000
Annualized Sharpe (Rf=0%)    0.0042000
maxDrawdown                  0.5602872
                          URI
Annualized Return            0.3518000
Annualized Std Dev           0.4596000
Annualized Sharpe (Rf=0%)    0.7654000
maxDrawdown                  0.5902133
                          DOOR
Annualized Return              0.134000
Annualized Std Dev             0.459700
Annualized Sharpe (Rf=0%)      0.291500
maxDrawdown                    0.585242
                          IMO
Annualized Return            0.2052000
Annualized Std Dev           0.4360000
Annualized Sharpe (Rf=0%)    0.4706000
maxDrawdown                  0.7326301
                          TRP
Annualized Return            0.0603000
Annualized Std Dev           0.3004000
Annualized Sharpe (Rf=0%)    0.2009000
maxDrawdown                  0.4164055
                          MKL
Annualized Return             0.052800
Annualized Std Dev            0.302900
Annualized Sharpe (Rf=0%)     0.174200
maxDrawdown                   0.446558
                          CVX
Annualized Return            0.1037000
Annualized Std Dev           0.3587000
Annualized Sharpe (Rf=0%)    0.2890000
maxDrawdown                  0.5577392
                          DE
Annualized Return           0.2225000
Annualized Std Dev          0.3372000
Annualized Sharpe (Rf=0%)   0.6600000
maxDrawdown                 0.3791293
                          G
Annualized Return          0.0639000
Annualized Std Dev         0.2983000
Annualized Sharpe (Rf=0%)  0.2141000
maxDrawdown                0.4947237
                          SF
Annualized Return           0.1865000
Annualized Std Dev          0.4030000
Annualized Sharpe (Rf=0%)   0.4627000
maxDrawdown                 0.5189201
                          WEX
Annualized Return            0.0428000
Annualized Std Dev           0.4688000
Annualized Sharpe (Rf=0%)    0.0912000
maxDrawdown                  0.6460256
                          RRX
Annualized Return            0.1128000
Annualized Std Dev           0.3750000
Annualized Sharpe (Rf=0%)    0.3007000
maxDrawdown                  0.4232069
                          BLD
Annualized Return            0.4420000
Annualized Std Dev           0.4804000
Annualized Sharpe (Rf=0%)    0.9202000
maxDrawdown                  0.5225713
                          AVNS
Annualized Return            -0.1438000
Annualized Std Dev            0.4407000
Annualized Sharpe (Rf=0%)    -0.3262000
maxDrawdown                   0.6696629
                          SPH
Annualized Return            0.0671000
Annualized Std Dev           0.3308000
Annualized Sharpe (Rf=0%)    0.2028000
maxDrawdown                  0.5569809
                          SHEL
Annualized Return             0.0652000
Annualized Std Dev            0.3756000
Annualized Sharpe (Rf=0%)     0.1737000
maxDrawdown                   0.6554945
                          CHTR
Annualized Return             0.0797000
Annualized Std Dev            0.3156000
Annualized Sharpe (Rf=0%)     0.2526000
maxDrawdown                   0.6305161
                          AMP
Annualized Return            0.2970000
Annualized Std Dev           0.4056000
Annualized Sharpe (Rf=0%)    0.7323000
maxDrawdown                  0.5388382
                          IBP
Annualized Return            0.3157000
Annualized Std Dev           0.5319000
Annualized Sharpe (Rf=0%)    0.5936000
maxDrawdown                  0.6168815
                          CAT
Annualized Return            0.1637000
Annualized Std Dev           0.3282000
Annualized Sharpe (Rf=0%)    0.4988000
maxDrawdown                  0.3855426
                          MCRI
Annualized Return             0.1263000
Annualized Std Dev            0.4883000
Annualized Sharpe (Rf=0%)     0.2586000
maxDrawdown                   0.7507023
                          ACGL
Annualized Return             0.2666000
Annualized Std Dev            0.3344000
Annualized Sharpe (Rf=0%)     0.7971000
maxDrawdown                   0.5383977
                          CI
Annualized Return           0.1062000
Annualized Std Dev          0.3417000
Annualized Sharpe (Rf=0%)   0.3106000
maxDrawdown                 0.4154987
                          ELV
Annualized Return            0.1322000
Annualized Std Dev           0.3437000
Annualized Sharpe (Rf=0%)    0.3848000
maxDrawdown                  0.4412388
                          FLT
Annualized Return            0.0502000
Annualized Std Dev           0.3522000
Annualized Sharpe (Rf=0%)    0.1425000
maxDrawdown                  0.5012924
                          EPC
Annualized Return           -0.0032000
Annualized Std Dev           0.4291000
Annualized Sharpe (Rf=0%)   -0.0075000
maxDrawdown                  0.5428633
                          PRI
Annualized Return            0.1786000
Annualized Std Dev           0.3457000
Annualized Sharpe (Rf=0%)    0.5166000
maxDrawdown                  0.5446819
                          WRB
Annualized Return            0.1838000
Annualized Std Dev           0.2928000
Annualized Sharpe (Rf=0%)    0.6276000
maxDrawdown                  0.4534569
                          PYPL
Annualized Return            -0.0835000
Annualized Std Dev            0.4397000
Annualized Sharpe (Rf=0%)    -0.1899000
maxDrawdown                   0.8366771
                          SIRI
Annualized Return            -0.0201000
Annualized Std Dev            0.3964000
Annualized Sharpe (Rf=0%)    -0.0507000
maxDrawdown                   0.5007201
                          VMI
Annualized Return            0.1348000
Annualized Std Dev           0.3345000
Annualized Sharpe (Rf=0%)    0.4030000
maxDrawdown                  0.4516082
                          KMI
Annualized Return            0.0791000
Annualized Std Dev           0.3224000
Annualized Sharpe (Rf=0%)    0.2454000
maxDrawdown                  0.5512589
                          SEDG
Annualized Return              0.155800
Annualized Std Dev             0.675100
Annualized Sharpe (Rf=0%)      0.230700
maxDrawdown                    0.807591

Blue sky (bs):
What could Buffet be doing? I don't know, but am guessing he doesn't get excessively 'quant' on past data. FWIW, here's a guess: he asks himself if he like the management? If he does, he takes a quick look at past performance, i.e. both share price performance and also e.g. growth in book value, EPS, and other 'fundamental' measures over a period that interests him. So, I'm not suggesting that Buffet doesn't look at past data, just that he may be looking through a different lens. Maybe he asks if management has been in place over whatever past period he looks at? Perhaps it's a look over more than the past 5 years, e.g. maybe he also looks at how well management handled general shocks to the financial system. Maybe he looks at capex and makes qualitative decisions about whether it was a good idea or not to spend that money in that way. Maybe he looks at what wasn't done, i.e. if in the ZIRP period they didn't assume some leverage then maybe that counts in his mind against management? If he does like management well enough, perhaps he actually forgives them some past errors that negatively impacted the bottom line (after all, WEB does admit his own errors)? Does management have history in other endeavours, perhaps he tracks how certain people have done in other endevours?
I surely don't know what WEB does, I'm just trying to give an example of something that isn't totally 'quant' on past data. The above is more management oriented, allows 'forgiveness' for something that would kick a firm out of a total quant screen, has qualitative and not quantitative elements e.g. "why did they fund via equity and not debt, even though the stats still look good?".

A stock I mentioned recently isn't cheap enough by this metric: Hershey at $189.41 as I type.

But, FWIW
data from Value Line

EPS growth rate last 10 years = 9.5%/year
EPS growth rate last 5 years = 10%/year (getting a pinch better, not slowing down)
Projected EPS growth rate next 3-5 years = 9.5%/year

Those are all based on their estimate that the current rate of earnings is about $9.51/share/year (two trailing quarters + two quarters estimates)
Today's price is 19.9 times that.
Certainly over 15, but their average annual P/E is 27.5. Some people might think it's fair to pay a premium price for premium goods.

Anyway, if the price goes back to its average multiple, and the earnings grow as fast as that forecast (two big ifs),
then a buyer today would make 38% one time gain on multiples at some point, plus 9.5%/year, plus the dividend yield 2.5%/year.

I haven't bought any [yet], just thinking out loud. So far.

Jim

Hsy

Conservative EPS 7.92 base (3 year average) x 10% EPS growth x 5 years 12.76 x 20 multiple= 255, want a 12% return? equates to an entry price of $144 entry price.

23% overvalued?

Their past stats are very nice -- past performance no guarantee of future success (:->

From  1980-03-18 to date:
                                HSY
Annualized Return            0.1545000
Annualized Std Dev           0.2456000
Annualized Sharpe (Rf=0%)    0.6290000
maxDrawdown                  0.4915425

Past 5 years (roughly), from 2019-01-02 to date:
                                HSY
Annualized Return            0.1463000
Annualized Std Dev           0.2299000
Annualized Sharpe (Rf=0%)    0.6364000
maxDrawdown                  0.3275374

Stats compared to SPY from 1993-02-01 (start of SPY data) to date:
                               HSY          SPY
Annualized Return            0.1170000    0.0955000
Annualized Std Dev           0.2312000    0.1880000
Annualized Sharpe (Rf=0%)    0.5060000    0.5077000
maxDrawdown                  0.4915425    0.5518945

Stats compared to SPY past 5 years (roughly), from 2019-01-02 to date
                               HSY         SPY
Annualized Return            0.1411000    0.1265000
Annualized Std Dev           0.2305000    0.2125000
Annualized Sharpe (Rf=0%)    0.6122000    0.5953000
maxDrawdown                  0.3275374    0.3371725
  

Hsy
Conservative EPS 7.92 base (3 year average) x 10% EPS growth x 5 years 12.76 x 20 multiple= 255, want a 12% return? equates to an entry price of $144 entry price.
23% overvalued?

I think using 3-year average EPS for a firm that has had EPS increase at (say) 9%/year for ages is a bit conservative.
It's not entirely unreasonable to think that the earnings in a couple/few years will be higher, rather than lower, than the current result.
Financial journalism analysts are mostly fools, but the range of their consensus for next year of $10.27 seems more plausible to me than your $7.92.

The 20 future multiple you posit is reasonably prudent, and I would normally buy it as a reasonable assumption if not a tad optimistic. Basically, the current levels.
I certainly would not count on more than that, but truthfully I expect a fair bit more.

In case anybody cares, I bit the bullet and opened a position yesterday. Not trivial.

Jim

Well when the market is significantly over valued and doesn't reflect interest rate changes "yet", I've greater pessimism.

i don't expect this to be a major concern since it wasn't just Hershey, but as litigious as we've become as a society.....

https://www.reuters.com/business/retail-consumer/c...

"NEW YORK, Oct 25 (Reuters) - Consumer Reports said on Wednesday it had found "concerning" levels of lead and cadmium in a third of various chocolate products it tested recently, and called on Hershey (HSY.N) to reduce the amounts of heavy metals in its chocolate.

The non-profit consumer group said 16 of the 48 products from various makers that its scientists tested contained potentially harmful levels of lead, cadmium or both.

Products found to contain excessive metal content included a dark chocolate bar and hot chocolate mix from Walmart (WMT.N), cocoa powder from Hershey's and Droste, semi-sweet chocolate chips from Target (TGT.N), and hot chocolate mixes from Trader Joe's, Nestle (NESN.S) and Starbucks (SBUX.O).

The U.S. Food and Drug Administration told the nonprofit that experts consider chocolate a "minor source of exposure" to lead and cadmium internationally, but that manufacturers and processors remain responsible for ensuring their food's safety.

Consumer Reports said more than 75,000 consumers signed an earlier petition for Hershey to reduce heavy metals in its chocolate, and that it is now again petitioning the company."

best,

mike

At 185, the stock is down another 4% from last post.

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