Warren Buffett Would Love These Stocks - 40511 views

By Stockpickr Guest Columnist Glen Bradford

Stock buybacks are better than dividends when it's tax time. Buybacks decrease the quantity of outstanding shares, enhancing returns for long-term investors such as Warren Buffett.

The following companies are even better than that. Their net incomes are growing faster than their peers'. Buffett loves his mainstays, such as Wells Fargo (WFC), Johnson & Johnson (JNJ), U.S. Bancorp (USB) and Bank of America (BAC), but here are some other plays he might like to get his hands on.

Ebix (EBIX): Recently, the board of directors approved a 3:1 split on the stock. This split and increasing share buyback programs are a sign that upper management sees growth on the horizon. The return on investor equity is strong, too, which proves that management is highly capable of reinvesting within the company. Now we're rolling, and it's full steam ahead with the release of record earnings. Check the chart. Net incomes are on an exponential growth curve as Ebix expands from the insurance to health care industry. I'll buy this stock, and I'll sell it back to the company at a higher price.

Terex (TEX): Terex manufactures heavy construction equipment -- more along the lines of building hospitals and skyscrapers than homes. The sector has been in trouble, but this stock is poised to rocket. If you look closely at this buyback, they are taking all their income and using it to buy shares at this monster discount. You know global infrastructure is bound to increase as more people move to the thriving cities. The P/E is super low, and the earnings are growing as if there weren't a housing bust. This company might be paying for your next house if you decide to own it.

LSB Industries (LXU): LSB Industries just did some serious damage to its earnings expectations. It crushed them. This company also is involved in buying back shares but hasn't announced specifics. Jim Cramer has announced that this company is flying under the radar. At least he caught this one! On March 12, LSB announced that it will be undertaking a share buyback. The trick here is to buy the shares before LSB gets to them. Granted, climate control is really boring, and you've never heard of this company. It's cheap, growing and boring -- perfect for Buffet.

Companies such as these can effectively manage their returns on equity and grow even faster. They demand attention. When they announce they are buying back their shares in a weaker economy and their shares are dirt cheap, it's time to get in.

Disclosure: I own EBIX, TEX and LXU. You should too.

You can check out my other ideas at GlenBradford.com.

Posted on Aug. 18, 2008

By:bradford86

Date: 08/25/08

Mr. Bradford,

Sorry to say, this is a very disappointing aritcle. What is the connection between taxes and decreasing the number of shares outstanding? Is this a new strategy of Mr. Buffett? You fail to make the connection.

Other points - Why are earnings going to "rocket"? How does any of this related to Mr. Buffett's investing strategy?

You sound like a used car salesman.
By:skipolinger@comcast.net
Date: 08/19/08
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Good Day skipolinger@comcast.net

I try to write my articles as concise as possible and omitted a few details that you brought into question.

Q1: You asked for the connection between taxes and decreasing the number of shares outstanding.

Answer1:

When a company achieves a positive net income (makes money), there are many ways to utilize this money that benefit the shareholders. Generally, this made money first is categorized under shareholders’ equity. The company can use this money to improve it’s facilities and make general repairs, expand into other locations, purchase other companies, pay dividends, or buy-back stock. It is my understanding that Warren would have it that the company will make the decisions that in their minds benefit the shareholders the most. In the case of Terex, the current construction dilemma doesn’t warrant a lot of investment in purchasing more production equipment. Also, paying a dividend involves a double taxation. The income is first taxed at the corporate level and then is taxed when the investor receives the dividend. When the company buys stock back (reducing the number of outstanding shares), this net income only gets taxed once. I don’t believe paying less taxes is a new strategy of Mr. Buffet. He achieves this through several measures, such as avoiding trading companies and buying them with the intent of owning them. This avoids lots of transaction costs and taxes.

Q2: You asked why earnings are going to rocket.

Answer2:

I play my cards with good management. It’s my opinion that good management tends to make good decisions. With companies deciding to buyback stock at lower price levels when their company isn’t being pulled to expand, I can see them also making favorable decisions when business is booming.

Hope this helps.

Glen Bradford
www.glenbradford.com

By:skipolinger@comcast.net

Date: 08/19/08

Mr. Bradford,

Sorry to say, this is a very disappointing aritcle. What is the connection between taxes and decreasing the number of shares outstanding? Is this a new strategy of Mr. Buffett? You fail to make the connection.

Other points - Why are earnings going to "rocket"? How does any of this related to Mr. Buffett's investing strategy?

You sound like a used car salesman.

By:skipolinger@comcast.net

Date: 08/19/08

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