Situation: In order to “corral” a group of companies for close attention, investors have to work from a theme or Central Thought. I did this recently (Month 126) by focusing on A-rated non-financial companies in the S&P 100 Index. Now I’ve doubled the catchment population and improved the definition of A-rated. Stocks that S&P rates B/M and B/L are now included (MRK, KO, WMT, CAT, QCOM). Companies that are capitalized by issuing long-term loans valued at more than 2.5 times equity are now excluded (HD, AMGN, CL, IBM).
Mission: analyze companies on the newly updated list.
Execution: see Table.
Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 13 companies meet that standard: LLY, MRK, CSCO, PG, TXN, JNJ, PEP, ETN, LMT, UPS, ITW, MMM, QCOM. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AO) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds rather than common stock (see Column W). Five companies (MRK, ADP, APD, INTC, CMCSA) have a BUY rating from Morningstar, and 14 companies have Debt:Equity ratios of less than 1.0 (MRK, ADP, PFE, CSCO, PG, TXN, APD, JNJ, INTC, ETN, WMT, CMCSA, RTX, GD). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 24 companies (LLY, MRK, ADP, PFE, CSCO, WM, PG, TGT, TXN, JNJ, KO, INTC, PEP, ETN, LMT, WMT, CMCSA, RTX, UPS, ITW, CAT, GD, MMM, QCOM) have Free Cash Flow remaining after dividends have been paid. His third point ( that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 10 companies have PEGs under 2.0 at both time points (MRK, PFE, TGT, APD, ETN, CMCSA, UPS, ITW, CAT, QCOM). 3 companies are cited 4 times (MRK, ETN, CMCSA).
Bottom Line: The stock market will be experiencing turbulence for some time. Merck (MRK) and Comcast (CMCSA) appear most likely to weather the storm.
Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into MRK, NEE, PFE, CSCO, PG, TXN, JNJ, KO, INTC, LMT, WMT, RTX, UPS, CAT, and also own shares of APD, CMCSA, GD and MMM.
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