What exactly is a "Buffett stock?" Unhelpfully, I could answer, "A stock that Warren Buffett might like."
Since Buffett is lauded as one of the best investors of the modern era, it makes sense that pretty much everyone wants to find stocks that Saint Warren of the Equities might approve of. But since it's easy to twist and readapt things that Buffett has said at one time or another, there are plenty of instances of stocks being hyped as "Buffett worthy" that, well, aren't even close.
My colleague Ilan Moscovitz and I have jumped on something we've dubbed the "Buffett ratio." The Buffett ratio is a measure of profitability similar to return on capital that he outlined in his most recent letter to Berkshire Hathaway (NYSE: BRK-B ) shareholders.
Last month, Ilan rounded up the 10 companies that have the highest Buffett ratio. I thought that I'd pick it up from there and whittle down the list a bit further. So for our purposes, a "Buffett stock" is one that has a high Buffett ratio, a low valuation, and a business that is relatively predictable.
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