Warren Buffett's Stock Picking List

1.      Advo Inc.

2.      American Brands

3.      American Express

4.      Amerada Hess Corp.

5.      American Home Products

6.      American Safety Razor

7.      Anheuser-Busch

8.      Bear Stearns

9.      Bristol-Myers Squibb Company

10.  Campell Soup

11.  Capital Cities Communications

12.  Circuit City Stores

13.  Coca-Cola Bottling Company Consolidated

14.  Coca-Cola Enterprise

15.  Coca-Cola FEMSA

16.  Cox Communications

17.  Dean Witter Discover

18.  Disney

19.  Dunn & Bradstreet

20.  EXXonMobile

21.  Freddie Mac

22.  Gabelli Equity Trust

23.  Gallaher Group

24.  GEICO

25.  Gennett Corporation

26.  General Electric

27.  Gillette

28.  H & R Financial Services, Inc

29.  Hershey Foods

30.  HRPT Properties Trust

31.  International Flavors & Fragrances

32.  IPG

33.  JDN Realty

34.  Justin Industries

35.  Knight-Ridder

36.  Leucadia National

37.  Liz Claiborne

38.  Loews Corporation

39.  MBIA Inc.

40.  Mcdonald

41.  Media General Inc.

42.  Mercury General Corp.

43.  Merill Lynch & Compay, Inc.

44.  Morgan Stanley Group

45.  Netstle

46.  New York Times

47.  NIKE

48.  Ogilby & Mather

49.  Panamerican Beverages

50.  Pepsi

51.  Philip Morris

52.  Premier Industrial Corporation

53.  Property Capital Trust

54.  Progressive Corp.

55.  Ralston Purina Group

56.  Seagram Co.

57.  Suntrust Banks

58.  Thomson Corp.

59.  Tiffany & Co.

60.  Times Mirror

61.  Torchmark Corp.

62.  USG Corp

63.  UST Inc.

64.  Wal-Mart Stores

65.  Warner-Lambert Company

66.  Washington Post

67.  Wells Frago

WARREN BUFFETT'S INVESTMENT PRINCIPLES

 1. The company should be soundly managed. Tests of good management include:

• Share buybacks: Has the company been buying back its shares, and if so, has it bought them responsibly?
• Good use of retained earnings: Has management wisely used retained earnings to increase the rate of return to shareholders?
• Sticking to what you know: Does the company invest in and operate businesses within its area of expertise?

2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:

• Company growth: Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
• Dealing with inflation: Does the company have the ability to maintain or increase profitability by raising prices?
• Capital expenditure: Is the company going to regularly require large capital sums to ensure continuing profitability?
• Brand names: Does the company sell brand name products that are likely to endure?

3. The company should have consistently high returns. Warren Buffett would look at both:

• Returns on equity
• Returns on capital

4. The company should have a prudent approach to debt: Is the company, looking at both long-term debt, and the current position, conservatively financed?

5. The businesses of the company should be simple and the investor should have an understanding of the company: Is the business of the company easily understood?

High quality companies worth to put under my watchlist

Health Care
ABT
ACL
AMGN
AZN
BMET
BSX
BMY
LLY
DNA
GSK
GDT
JNJ
MDT
MRK
NVS
PFE
SNY
SGP
SYK
UNH
ZMH

Consumer Services
HRB
HD
LOW
SYY
WMT
WAG
EBAY

Business Services
ADP
CTAS
EFX
EXPD
FDC
FISV
GYI
RX
MCO
PAYX
TSS
UPS

Financial Services, Insurance/Asset Management
AFL
AC
AXP
BRK.B
BLK
EV
MMC
PGR
SLM

Financial Services, Banks/Finance
BK
COF
C
FNM
FITB
FRE
NTRS
STT
WFC

Software
ADBE
ADSK
INTU
MSFT

Hardware
AMAT
CSCO
DELL
IBM
INTC
LLTC
MXIM
QCOM

Media
CMCSA
DJ
JW.A
MHP
WPO

Consumer Goods
MO
BUD
AVP
FUN
KO
CL
G
HDI
HSY
ISCA
PEP
PG
WWY

Industrial Materials
MMM
GD
GNTX
PBI
UTX

Energy
KMI
KMP

My calculation of intrinsic value for Apple Inc.

On my 17th Oct post I calculated Apple Inc's intrinsic value was about $343,37 per share base on my old calculation method. It was trading at $306.73 base on 19th Nov US market closing price.

Now I want to apply Morningstar's calculation method to work out the intrinsic value and make a comparison here.

AAPL

Current year (2010) FCF: 16,590M
Estimated next 10 yrs FCF growth rate: 10%
Perpetuity growth rate (g): 7%
Discount rate (R): 15%

Step 1: Forecast FCF for the next 10 years

2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
18,249	20,074	22,081	24,289	26,718	29,390	32,329	35,562	39,118	43,030

Step 2: Discount these FCFs to reflect the present value

2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
18,249	20,074	22,081	24,289	26,718	29,390	32,329	35,562	39,118	43,030
1.15	1.32	1.52	1.75	2.01	2.31	2.66	3.06	3.52	4.05
15,869	15,736	15,325	14,925	14,536	14,157	13,788	13,428	13,078	12,736

10 yrs discounted FCFs = 143,578

Step 3: Calculate the perpetuity value and discount to the present value

Perpetuity value = (43,030 x 1.10) / (0.15 - 0.07) = 591,663
Discounted to PV = 591,663 / 1.15^10 = 146,089

Step 4: Calculate total equity value = 10 yrs FCFs + Perpetuity value

Total equity value = 143,578 + 146,089 = 289,667

Step 5: Calculate per share value = Total Equity Value / Total share outstanding

Share outstanding: 917.31M
Per share value = 289,667 / 917.31 = $315.78

It seems Morningstar's calculation method was much closer to the current stock price, but please take of the main differences here. For both calculation I used discount rate as 15% that was fine, but in old method we estimated next 10 yrs EPS growth rate @ 23.61% per year. Here we only used 10% for next 10 yrs FCF growth rate and then used 7% for perpetuity FCF growth rate.

The basic idea here is the assumption for the growth rate play a very important role to determine the intrinsic value calculation result. The key is we should take into consideration of the size of the company, industrial cyclicality, economic moat, management team, and the complexity of the business to pick a comfortable estimated growth rate - assigning estimated growth rate is an inexact science - there are no "right" answers for any stock analysis.

The Five Rules for Successful Stock Investing

Recently I read a book named The Five Rules for Successful Stock Investing which was written by Morningstar's Director of Stock Analysis, Pat Dorsey; it covering a wide range of stock research and investment strategies. This comprehensive guide can helping any serious investors on their right track to pick the right stocks, find great companies without paying too much for their investment. I summarized some important topics and investment strategies here:

Five rules recommend by Morningstar:
1. Do your homework
2. Find economic moats
3. Have a margin of safety
4. Hold for the long haul
5. Know when to sell

4 steps to analyze a company's economic moat:
1. Evaluate the firm's historical profitability.
2. If the firm has solid return on capital and consistent profitability, assess the source of the firm's profit.
3. Estimate how long a firm will be able to hold off competitors, which is the company's competitive advantage period.
4. Analyze the industry's competitive structure.

5 ways that an individual firm can build sustainable competitive advantages:
1. Creating real product differentiation through superior technology or features.
2. Creating perceived product differentiation through a trusted brand or reputation.
3. Driving cost down and offering a similar product or service at a lower price.
4. Locking in customer by creating high switching costs.
5. Locking out competitors by creating high barriers to entry of high barriers to success.

The 4 sources of growth:
1. Selling more goods or services
2. Raising prices
3. Selling new goods or services
4. Buying another company

Some Red Flags and Pitfalls to watch out for:
1. Decline cash flow
2. Serial chargers - be wary of firms that take frequent one-time charges and write-downs.
3. Earning growth outstrips sales growth over a long period, this might be a sign of manufactured growth.
4. The CFO or Auditors leave the company.
5.A/R are increasing much faster than sales growth.
6. Gains from investments
7. Overstuffed warehouse - inventories rise faster than sales.
8 Change is bad - for example like depreciation expenses.
9. To Expense or Not to Expenses - costs such as marketing and some kind of development can be treated either way.

5 Steps to calculate a firm's intrinsic value:
Step 1: Forecast free cash flow (FCF) for the next 10 years
Step 2: Discount these FCFs to reflect the present value
Step 3: Calculate the perpetuity value and discount to the present value
Step 4: Calculate total equity value = 10 yrs FCFs + Perpetuity value
Step 5: Calculate per share value = Total Equity Value / Total share outstanding