3 Top Canadian Stocks From Buffett-Based Model

by: John P. Reese

Earlier this fall, Warren Buffett visited China to check in on BYD Company (OTCPK:BYDDY), the electric car and battery maker in which Buffett's Berkshire Hathaway has a 10% stake. And while there, he said that China's size and strong growth make the country a "logical" place for Berkshire to put more money to work.

China certainly offers many good investment options, but Buffett shouldn't overlook opportunities closer to home -- while the Guru Strategy computer model I base on his approach has been high on a few Chinese stocks recently, it's also finding a number of values right here in Canada.

In the past, I've written about U.S.-traded Canadian stocks that get high marks from my Guru Strategies (each of which is based on the approach of a different investing great). Now, my new Validea Canada web site allows me to use the same strategies to analyze stocks traded on the Toronto Stock Exchange. And right now, my highly selective Buffett-based model is finding value in several Canadian firms. Here's a look a particularly impressive trio, and why they've caught the eye of this hard-to-impress strategy. (All figures are in Canadian dollars and the following three stocks trade directly on the Toronto Stock Exchange.)

Alimentation Couche-Tard Inc. (OTCPK:ANCUF): This Quebec-based convenience store giant ($4.5 billion market cap) gets a perfect 100% score from my Buffett-inspired model. The firm, which operates the Couche-Tard, Mac's, and Circle K brands, has more than 5,800 stores across Canada and the U.S., more than 4,000 of which also offer motor fuel. It also has licensees in seven other regions, including China, Guam, Japan, and Mexico.

My Validea.ca Buffett-based model looks for firms that have a lengthy history of increasing earnings per share -- the types of firms whose performance you can depend on -- and Couche-Tard delivers. Its EPS have declined in only one year of the past decade (three years ago), and that was a minor 3% dip that it's rebounded quite impressively from, upping EPS 39% and 25% in the past two years.

The Buffett approach also targets companies with manageable debt; it likes firms that have enough annual earnings that they could, if need be, pay off their debt within five years. Couche-Tard has about $637 million in debt and $342 million in annual earnings, easily passing the test.

Buffett is also known to look for strong management, and one way he has measured that is with return on retained earnings. This is determined by taking the total amount of earnings a firm has retained (i.e., not paid out as dividends) over the past ten years, and dividing that into the amount its EPS have risen over the same period. Essentially, it shows how the company is using the profits it keeps to generate future profits. Couche-Tard has generated a 20.1% return on retained earnings over the past decade, easily topping this model's 12% target -- a sign that management is doing a great job.

Saputo Inc. (OTCPK:SAPIF): The largest dairy processor in Canada, Saputo produces 32% of the country's natural cheese and processes 35% of its milk. The Quebec-based firm also has operations in Europe, South America, and the U.S., and is Canada's largest snack cake manufacturer.

Saputo ($7.9 billion market cap) gets a solid 86% score from my Buffett-based model. It has a strong history of upping earnings, with EPS rising in 8 of the past 10 years. It also has a solid balance sheet, with about $381 million in debt and more than $438 million in annual earnings. That means it could pay off its debt in less than a year, which my Buffett-based model considers exceptional.

Buffett is known to seek companies with a "durable competitive advantage" -- an edge (such as name or brand recognition or pricing power) that makes it difficult to compete with, no matter how much money or initiative a competitor has. Buffett has found that high returns on equity and total capital tend to be signs of such an advantage. My Buffett-based model on Validea.ca looks for firms with 10-year average ROEs of at least 15%, and 10-year average ROTCs of at least 12%. Saputo's size and brand power would seem to give it a durable competitive advantage, and, at 17.5% and 19.4%, respectively, its 10-year average ROE and ROTC bear that out.

North West Company Fund (OTC:NWTUF): This Winnipeg-based community grocery store/retailer group has stores in Canada, Alaska, the South Pacific, and the Caribbean, some of which trace their roots back more than 340 years. The majority of its stores operate under the Northern, Giant Tiger, Quickstop, and NorthMart names. It has a market cap of just under $1 billion.

North West gets an 80% score from my Buffett-based approach, in part because it has upped EPS in each year of the past decade. With about $82 million in annual earnings, the company could also pay off its $174 million in debt in a little over two years if it needed to, which gets high marks from the Buffett-based approach modeled on Validea.ca.

North West pays out a good deal of earnings (more than 80%) in dividends, but management appears to be doing a great job with the earnings it does hold on to. The firm has generated an excellent 55.4% return on retained earnings over the past decade. It's also averaged a 19.9% return on equity and a 16.4% return on total capital over that same period, passing two other Buffett model tests.

Disclosure: No positions