Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett and Lynch - Forbes3

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  04/09/2013 22:28Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - ForbesPage 1 of 6 Get 2 FREE Issues of Forbes Help|Connect|Sign up|Log in Most Read on Forbes OUR WRITERS INVESTING |   9/04/2013 @ 11:46AM |3,808 views Legendary Investor Playbook: 37Stocks From Seven Masters:Graham, Buffett And L ynch Tina Russo , Forbes Staff PAGE 3 OF 4 In a nutshell, Buffett looks for companies that have strong brands (which promotes premium pricing) that run understandable businesses with a goodreturn on capital without a lot of debt. Profits should show up in cash flow,earnings should be predictable, and management needs to be owner-oriented.Robert Hagstrom, author of The Essential Buffett: Timeless Principles ForThe New Economy,  summarizes Buffett’s approach: analyze a stock as abusiness; demand a margin of safety; manage a focused portfolio; and guardagainst speculation and emotion. Forbes enlisted the help of a stock screen from  AAII Stock  Investor Pro based on Hagstrom’s interpretation of Buffett’s investment criteria. Of course, Buffett’s success o wes just as much, if not more, to his patience and abilit y to control emotions as it does to any magic formula. The AAII Buffett screen hasa 10-year return of 14.5% compared to 5.5% for the S&P 500. For 5-years, themodel based on Buffett’s strategy has a return of 12.7% versus 5.9% for theS&P.Here is what we look for when searching for stocksthat appeal to Buffett: Market capitalization greater or equal to $1 billionPositive operating income for trailing 12 months and each of the past sevenfiscal yearsReturn on equity greater than 15% for current and threeprior yearsDebt-equity ratio better than industry medianOperating margin greater than industry medianNet profit margin greater than industry median   NEWS PeoplePlacesCompanies   Intelligent Investing Ideas from Forbes Investor Team Follow (410) Intelligent Investing is a contributor page dedicatedto the insights and ideas of Forbes Investor Team.Forbes Investor Team is comprised of thoughtleaders in the areas of money, investing andmarkets. INTELLIGENT INVESTING’S POPULAR POSTS Don't Gamble On Binary Options 355,039 views Stay In Stocks Or Sell In May? 74,748 views  What's The Best Sector For The Long Run? 52,823 views Five High-Dividend Plays That Are Still Cheap 46,579 views  Warning: Why You Shouldn't Follow Buffett IntoBofA's Stock 43,982 views Follow (410) Intelligent Investing IDE AS FROM FORBES INVESTOR TEAM 2 SmartphoneArms MerchantsAnd 3 OtherSmall-Cap Buys + show more Has LinkedIn Crossed An Ethical Line?Has LinkedIn Crossed An Ethical Line? +70,496 views Interactive Map: In 13 States Plus D.C.,Interactive Map: In 13 States Plus D.C.,Obamacare Will Increase HealthObamacare Will Increase HealthPremiums By 24%, On AveragePremiums By 24%, On Average +46,725 views Top 100 Inspirational QuotesTop 100 Inspirational Quotes +42,340 views New Bay Bridge Is All Yawn And NoNew Bay Bridge Is All Yawn And No Awe: Bring Back The American Awe: Bring Back The AmericanTechnological SublimeTechnological Sublime +34,592 views On Labor Day 2013, Welfare Pays MoreOn Labor Day 2013, Welfare Pays MoreThan Minimum-Wage Work In 35Than Minimum-Wage Work In 35StatesStates +30,089 views Comment Now   Follow Comments   New PostsNew Posts +3 posts this hour+3 posts this hour Most Most PopularPopular Highest-Paid Models ListsLists Top-Earning Tennis Sta    Video Video  Vegas' DJ Wars  04/09/2013 22:28Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - ForbesPage 2 of 6 Joseph Piotroski Price change greater than book value change over pastfive yearsLow price-to-free-cash-flow ratio Twenty-six names from a variety of industriescurrently make the grade. Included in the top tenranked by return on equity (12m) are  Accenture (ACN), Dollar Tree  (DLTR), Bed Bath &Beyond  (BBBY) and J2 Global  (JCOM). Joseph Piotroski isa little-knownaccounting professor who shuns publicity and rarely givesinterviews. But whatPiotroski lacks infame and fortune, hemakes up for with aunique investmentstrategy thatgenerates excellentresults.Piotroski graduated from the University of Illinois with a B.S. in accounting in 1989. He received anM.B.A. from Indiana University and earned a accounting from the University of Michigan.Currently he serves as an associate professor of accounting at Stanford University’s GraduateSchool of Business. He was an associate professor of accounting at the University of Chicago from 1999to 2007.In 2000, Piotroski wrote a 57-page paper in the  Journal of Accounting Research called “ValueInvesting: The Use of Historical FinancialStatement Information to Separate Winners fromLosers,” which sought to demonstrate that if youtake stocks with low price-to-book values (knownamong academics as high book to market stocks)and then use a nine-point scale to test the financial strength of the companies,you could significantly outperform the market.The strategy worked, powerfully: A stock screen run by the  AAII based onPiotroski’s approach has a 10-year return of 32.5%, compared to a return of 5.5% for the S&P 500 during that same period. The 5-year return is better, at40%, compared to 5.9% for the S&P. Year-to-date through the end of July, thePiotroski screen is up an amazing 105.7% versus 18.2% for the S&P.Piotroski sought companies trading with very low price-to-book value ratios.These are often financially distressed, which is why investors tend to steer MORE FROM INTELLIGENT INVESTING Jim Oberweis Contributor 5 ControversialGold Stocks And 3ETFs: Where'sThe Real Value? Jack Adamo Contributor 3 Dividend StocksTo Calm A Nervous Investor Peter Andersen Contributor Four Free CashFlow Yield All-Stars John Reese Contributor  04/09/2013 22:28Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - ForbesPage 3 of 6 clear of them. They are cheap because they deserve to be. But occasionally,they’re solid companies that are being unfairly neglected and present realbuying opportunities, if you can separate the trash from treasure.Piotroski developed a nine-point scoring system to separate the wheat fromthe chaff among low price-to-book companies. He would assign stocks pointsbased on the following criteria: profits, financial leverage, liquidity andoperating efficiency. Piotroski first limited his universe to the bottom 20% of stocks according to their price-to-book value ratio and this is our firstscreening criterion.With help from  AAII’s Stock Investor Pro screening software, we set out tofind Piotroski stocks in the current market. Here are the criteria we used (astock must satisfy at least eight of the nine parameters): The return on assets for the last fiscal year is positive.Cash from operations for the last fiscal year is positive.The return on assets ratio for the last fiscal year is greater than the return onassets ratio for the fiscal year two years ago.Cash from operations for the last fiscal year is greater than income after taxesfor the last fiscal year.The long-term debt-to-assets ratio for the last fiscal year is less than the long-term debt to assets ratio for the fiscal year two years ago.The current ratio for the last fiscal year is greater than the current ratio for thefiscal year two years ago.The average shares outstanding for the last fiscal year is less than or equal to theaverage number of shares outstanding for the fiscal year two years ago.The gross margin for the last fiscal year is greater than the gross margin for thefiscal year two years ago.The asset turnover for the last fiscal year is greater than the asset turnover forthe fiscal year two years ago. Only three stocks currently pass Piotroski’s tough criteria: Regional airline SkyWest  (SKYW), fresh-cut fruit and vegetable producer Fresh Del MonteProduct  (FDP), and trading exchange Nasdaq OMX Group  (NDAQ). Click here for 37 Stocks Legendary Investors Would Love An Oklahoma City, Okla., native,  William J. O’Neil  was born in 1933 andreceived a business degree from Southern Methodist University in 1955. In1958, he began his professional investing career as a stockbroker withHayden, Stone & Co. He became the best performing broker at the firm,thanks to his investment strategy, which still guides his approach to selectingstocks. In 1963, he founded his own firm, William O’Neil & Co., and at the ageof 30, he became the youngest person at the time to own a seat on the New ork Stock Exchange.Dubbed “Canslim,” O’Neil’s approach to finding winning stocks forms thefoundation of his  Investor’s Business Daily  newspaper, which he started in1983. With the profusion of stock charts replete with volume bars and movingaverages, one could easily mistake the strategy as based on technical analysis,  04/09/2013 22:28Legendary Investor Playbook: 37 Stocks From Seven Masters: Graham, Buffett And Lynch - ForbesPage 4 of 6 Page 1 2 3 4  « Previous Page Next Page » but it is more quantitative, placing heavy emphasis not just on chart patternsbut also requiring investment candidates to show strong fundamentals.O’Neil was an early adopter of computers to aid in investmentselection, using databases of priceand volume information to study thecharacteristics of the best-performing stocks before they madetheir huge moves.O’Neil laid out his investing strategy in his books  How To Make Money InStocks  and The Model Book of Greatest Stock Market Winners .One key element of the O’Neil strategy is to limit losses to no more than 7% or8% on any one stock, allowing investors to cut losses and invest another day.O’Neil’s Canslim strategy combines elements of fundamental analysis,technical analysis, risk management and timing. 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