Turning Over Stones

Another look at the "Buffett Screen" to see what ideas stand out.

The Oracle, Camillo Miola, 1880, oil on canvas (Getty Center)

In a world where several companies have market capitalizations well over $1 trillion, what is a small cap anymore?

If you do a quick search query, the most common answer you see on investing websites and other informational sites is $2 billion. In the decade-plus I have been writing about stocks and the market, the consensus was that small caps were less than $2 billion.

But that isn’t the case anymore. The biggest “small cap” in the S&P 600 small cap index is a $9 billion company. The largest small cap in the Russell 2000 is $41 billion (that will undoubtedly change soon). S&P even says in the datasheet for the S&P 600 that the median company size in the index is $1.9 billion.

Yes, the companies in these indices get booted and move up into mid-cap and large-cap indices. Still, the definition of a small-cap isn’t what it was when ExxonMobil was the largest company in the world, with a market value of just over $400 billion.

I say all of this because it leads into my own “Buffett Screen.” This isn’t from a Warren Buffett quote or anything like that. Rather, I developed a screen after reflecting on this 1999 Berkshire Hathaway meeting clip. Initially, I limited the screen to $2 billion, but it’s becoming increasingly apparent that companies that fall into the less than $10 billion bucket are similarly overlooked.

Here are the updated criteria:

• Trading region of primary security: USA & Canada

• Market capitalization: Between $1 million and $10 billion

• Return on total capital over the past 12 months (TTM):  greater than 15%

• Earnings before interest and taxes margin (TTM): Greater than 10%

• Price to Free cash flow: Less than 15 times

Let’s dig in.

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I will share the results from a stock screen I created using Koyfin. It is one of the many functions I find myself using daily on the Koyfin platform; It also allows me to create watchlists to track many portfolios, review a decade of financials, or compare companies on various metrics. Unleash the power of Koyfin’s platform and transform your research process by signing up for Koyfin here and receiving 10% off.

Disclaimer: I have an affiliate partnership with Koyfin and receive compensation if you sign up via the link above. It helps me fund this endeavor. I would still recommend using it even if I didn’t have this partnership because it’s an awesome product, but I’d be stupid to turn down a revenue opportunity. You get a discount, Koyfin gets new business, and I get a commission. Win-win-win)