It's tough keeping up with Warren Buffett.
He has tens of billions of dollars at his disposal via the balance sheet of his company, Berkshire Hathaway (BRK.A), access to analysts in his employ and, of course, the ability to contact CEOs and others in the know and have them answer his phone call. Let's be honest: He has inherent advantages over the average Joe.
But in one important way, folks like you and me have an advantage over him. Because Buffett has so much money to invest, he typically cannot buy into small-cap companies. Berkshire Hathaway has a market cap of about $360 billion that includes an investment portfolio worth north of $100 billion, which means investing in companies with market caps of a billion or two is uneconomical. Buying 10% of a $1 billion company would hardly register on Berkshire Hathaway's balance sheet. For this reason, though Berkshire will sometimes play in the small-cap space, it primarily sticks to larger-cap opportunities.
But unless you suffer from Buffett's affliction of having billions to invest, you can invest in small-caps and do so using essentially his strategy. Years ago, I automated the strategies employed by the best investors, including Buffett. I based my Buffett-inspired strategy on the Buffett-oriented approach Mary Buffett (his former daughter-in-law) described in her book, Buffettology. Right now, three smaller-cap stocks earn this strategy's highest rating. You can now travel where Buffett might want to go, if only he were you.
First Cash Financial Services (FCFS), with a market cap of $1.4 billion, operates over 800 pawn and consumer finance stores in the U.S. and Mexico. This company is a major player in its market that has managed to improve its EPS every year over the past decade. Its average return on equity is a hefty $18.1% during the past 10 years, while its average return on assets in the same time period was a strong 13.4%. My Buffett-based strategy projects how much an investor can expect to earn on the stock in the next 10 years based on buying at today's price. In the case of First Cash, the strategy projects a 16% annual return. Can't complain about that.
In our country's small- to mid-sized markets, one can often find a Hibbett Sports store. Calling itself "a neighborhood sporting goods store," the company (HIBB), which has a market cap of $1.2 billion, operates over 960 stores in 31 states. The company is very strong in the markets where it operates, has enjoyed increased EPS in eight of the past 10 years, has no long-term debt and an average return on equity of 23.7% over the trailing decade. In addition, the strategy projects an annual return to investors of 18.3%. A solid performer within its market niche.
CorVel (CRVL) is a medical claims management company with a $723 million market cap. The company seeks to improve health care management for employers, third-party administrators, insurance companies and government agencies. The company has no debt, EPS that has increased in eight of the past 10 years, return on equity of 21.6% and return on total capital that is also 21.6%. Expect to earn 16.3% on your investment, according to this strategy. As with First Cash and Hibbett, CorVel is a solid company with a well-priced stock.
