Wouldn't you love to get into the mind of a successful investor and see first hand how they find winning stocks? You can do just that when you read a book called Buffettology. In it the author, Mary Buffett, former daughter-in-law of Warren Buffett himself, lays out what she knew about the billionaire investor's stock-picking methods.
It isn't high finance and doesn't require equations with a lot of greek symbols. At most, a mix of common and business sense is necessary – two things that most investors have already.
He wants to see four things:
1) a company has a history of steadily rising earnings per share (EPS)
2) a consistently high return on equity, usually 12% or more
3) a consistently high return on invested capital, likewise 12%+
4) low or no long-term debt, preferably less than five times net annual earnings
If a company has a stable record of these four, they could be potential candidates.
What are some of the ASX stocks that could make the initial short list?
Slater & Gordon Limited (ASX: SGH) has more than doubled EPS since listing in 2007. The personal injury law specialist has a growing network of law practices in Australia and the UK. Double-digit earnings increases are expected over the next several years and long-term debt is at a manageable level.
Domino's Pizza Enterprises Ltd (ASX: DMP), the world's largest franchisee group of Domino's Pizza, meets all four checks with flying colours. The pizza chain still has room to expand in Australia and its Domino's Pizza Japan business is projected to double its store numbers over the next five years.
Flight Centre Travel Group Ltd (ASX: FLT) consistently has ROE and ROIC over 20%, so that's a good sign of a durable company. Long-term debt is $2 million against $206.9 million in annual net earnings in financial year 2014. That's a solid business overall.
REA Group Limited (ASX: REA) has had an impressive ten years of performance and is still looking to raise earnings in the double digits. The operator of the realestate.com.au website carries no long-term debt and EPS has risen 17 times since 2005.
The interesting thing about this list of stocks is they are not unfamiliar companies with incredibly complex businesses. I prefer Domino's Pizza because it is an easily understandable business and REA Group because of its strong market position in property search and listing services.
