Linn Energy: Buffett Approved?
When you are looking for a solid stock pick, it helps to have one of the big wig investors favor it as well. It gives you that little bit of a confidence boost you may need to invest in a stock you have been eyeing. There are a few steps to follow when deciding whether or not a stock is Buffett worthy. Today, Ilan Moscovitz is looking at Linn Energy, and evaluating it on Buffett’s criteria.
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Over the past five years, Linn Energy has struggled a bit to produce positive earnings.
2. Return on equity and debt
Return on equity is a great metric for measuring both management’s effectiveness and the strength of a company’s competitive advantage or disadvantage — a classic Buffett consideration. When considering return on equity, it’s important to make sure a company doesn’t have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Like many of its peers, Linn Energy has tended to generate low-to-negative returns on equity while employing fairly high amounts of debt over the past few years
CEO Mark Ellis took the job in 2010 after the company’s founder gave up the spot (he still serves as chairman). Prior to that, he was the company’s COO for a few years, and he has worked for various other companies, including ConocoPhillips and Burlington Northern.
The oil and gas exploration and production industry isn’t particularly susceptible to technological disruption.
Does Linn Energy pass the test? Not quite. It may be operating in an honest and easy to understand way. However, some of the other elements are lacking. Buffett worthy? Not quite.
Quotes taken from report byIlan Moscovitz, Read the entire article here.
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