What Would Buffett Buy? Try Retail

What types of stocks might be on Warren Buffett’s Christmas list this year? Michael Brush of MSN.com says one area of the market that fits the bill is retail, and he uses data from Validea’s Buffett-based screener to back it up.

Brush notes that Buffett has already been adding to his retail stake, with his Berkshire Hathaway upping its investment in Wal-Mart by almost 20 million shares in the third quarter. And, he says that the gloomy outlook for retailers makes the area one that Buffett, as a contrarian, might have more interest in. “Retailers are a good contrarian play because so many smart investors — not just the always-bearish crowd — are so negative on the consumer,” Brush writes. “As Buffett might say, that negativity alone [in the retail sector] is a great reason” to target retailers.

Brush also lists three reasons why the negativity may well be overblown:

  • Employment trends are becoming more favorable, and the economy is closer to actual job creation;
  • People feel wealthier after a great year in the market, like 2009;
  • Lower energy costs are helping the consumer.

In terms of individual stocks, Brush keys on seven retailers that get good grades from Validea’s Buffett-based screener: Wal-Mart, Coach, Jos. A. Bank Clothiers, Ross Stores, Family Dollar Stores, Aeropostale, and Buckle. And those seven picks share a common theme. “All the plays … are sensible discount retailers in one way or another,” notes Brush. “Ross is the second-largest off-price retailer in the nation, offering brand-name apparel at prices significantly lower than department stores. Aeropostale offers reasonably priced casual apparel to teens. Jos. A. Bank gives men great deals on suits. Buckle is a medium-priced vendor of casual apparel. Even Coach is a ‘frugality play’ of sorts because it now offers luxury handbags for less.”

The seven picks all have the strong earnings history, solid financing, and high return on equity that Validea’s Buffett-based model looks for. And while Brush says they aren’t the “fat pitch” bargains that Buffett likes, he adds that “you can make a case that most of them still look reasonably cheap.”

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