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Everyone wants to beat the long-term performance of the S&P 500. Hundreds of investors will try to sell you their techniques for doing so, usually with various short-term trading schemes. However, by understanding and using the probabilities of the stock market, investors can beat the market over the long-term without an expensive stock service or advisor. We just need to look at one of the best investors of all time, Warren Buffett, to make some reliable picks that will stand the test of time. Yes, these are buy and hold stocks that can safely be held for 10, 20 years or more.

Some of the common denominators that define a Buffett stock are:

1. Earnings Stability: Steady earnings growth over time equals steadily rising stock prices. Warren looks for companies in his sweet spot that achieved 15% yearly earnings growth over the past 25 years.

2. Evaluate Stock Investments in the context of bond yields: What can get you a better yield: bonds or stocks? To determine this we must calculate the hurdle rate (the minimum amount of return that a person requires before they will make an investment in something). Hurdle rate = stock’s earnings per share divided by the treasury bond rate. For example, let’s use (KO) Coca Cola’s E.P.S of 5.06 and divide that by the ten year treasury bond yield of 3.40. We calculate 5.06 by 0.034 for a hurdle rate of 148.82. This means that since KO is trading under $148.82, then buying the stock is a better investment than the bonds. Alternatively, if the stock was trading over $148.82, then the bonds would be the better investment.

3. Book Value: When you look at Buffett’s stocks you’ll notice that they trade between one and five times their book value per share. Many of them trade between one and two times book value per share. The book value is the value of the stock according to its balance sheet.

4. Return on Equity (ROE): Use ROE to predict future performance.

ROE = ________ Net Income____________

(Ending Equity + Beginning Equity)/2

If ROE rises steadily, then earnings should also rise. Look for companies that are consistent ROE growers.

5. Buffett’s 15% Rule: Ensure that the company can return at least 15% a year over a long period (10 years or more). If the earnings growth rate plus expected dividends doesn’t equate to 15% annual returns, then forget that stock.

With these rules in mind, let’s take a look at Warren Buffett’s top ten stocks that fit his criteria:

1. Coca Kola (KO) This stock is Buffett’s largest holding and takes up 25% of his portfolio. It's currently paying a dividend of 2.8% and is expected to grow earnings at 9.6% for the next five years. Coke’s EPS is $5.06 and it has an ROE of 41.8%. It is trading at five times book value.

2. Wells Fargo (WFC) This large bank comprises 20% of Buffett’s portfolio. It’s paying a dividend of 0.7% and is expected to grow earnings at 6%. It is nicely valued as it’s trading only 1.27 times book value. It has an EPS of 2.21 and an ROE of 10.5%.

3. American Express (AXP) The credit card / financial conglomerate takes up about 12% of the guru’s portfolio. It pays a dividend of 1.5% and is expected to grow earnings at 11.3% per year. AXP stock price is 3.47 times its book value per share. The company has an EPS of $3.35 and an ROE of 26.5%.

4. Procter and Gamble (PG) This huge producer of various consumer staples comprises 9.4% of Buffett’s portfolio. It sports a 3.3% dividend and is expected to grow earnings at about 9% per year for the next five years. PG is trading at 2.8 times its book value. EPS is currently at $3.67 and it has a 16.74% ROE.

5. Kraft Foods (KFT) The diversified food manufacturer takes up 6.31% of Warren’s portfolio. It boasts a healthy 3.7% dividend and is expected to grow earnings at 9.1%. Kraft’s stock is currently trading at only 1.6 times book value per share. Return on Equity is 8.06% and its EPS is $2.40.

6. Johnson & Johnson (JNJ) This researcher, developer, and manufacturer of pharmaceuticals, medical devices, and diagnostics comprises 5.02% of the master stockpicker’s portfolio and pays a dividend of 3.4%. It is expected to grow earnings at 5.6%. The stock is trading at 3.1 times book value per share. EPS is $4.41 and its ROE is 23.6%.

7. Wal- Mart (WMT) The large low-price retailer takes up 4.01% of Buffett’s portfolio and currently pays a dividend of 2.7%. It is expected to grow earnings at a healthy 10.3%. Its stock is trading at 2.75 times book value per share. ROE is 22.07% and EPS is $4.46.

8. Wesco Financial Corporation (WSC) This company is involved in the insurance, furniture rental, and steel service center businesses. This takes up 4% of Buffett’s portfolio and pays a modest dividend of 0.4%. Analysts only expect WSC to grow at less than 1% per year for the next three years. Although the $390 stock price appears expensive on the surface, this is only trading a few bucks above book value per share. Its ROE is 2.7% and it sports a healthy EPS of $10.14.

9. Conoco Phillips (COP) This integrated energy company comprises 3.77% of Warren’s portfolio and pays a divvy of 3.3%. It is expected to grow earnings at only 1.35% per year for the next five years. The stock trades at 1.68 times book value per share. Its ROE is 17.34% and EPS is $7.62.

10. U.S. Bancorp (USB) The financial corp. takes up 3.54% of Buffett’s portfolio and is paying a dividend of 2%. It is expected to grow earnings at 9.5% yearly for the next five years. The stock trades at 1.75 times book value, has an ROE of 11.46% and EPS of $1.73.

To conclude, there are a lot of solid picks here. The key to Buffett’s picks are that they grow consistently and have less risk to the downside. Take a look at the list and see which ones suit you the best. Chances are that you will beat the performance of the S&P 500 over the long term.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Beat the Market With Buffett's Top 10 Stocks