Is Paragon Shipping a Buffett Stock?

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As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Paragon Shipping (NYS: PRGN) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. That's what I try to find out in this series, because answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Paragon meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Paragon's earnings history:

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Source: S&P Capital IQ.Paragon has managed to remain profitable on a net income basis over the past five years, though that's fluctuated a bit. The massive free cash flow shortfalls were largely due to large capital expenditures.

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 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.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

Paragon52%(1%)9%
DryShips (NAS: DRYS) 99%2%11%
Navios Maritime Partners (NYS: NMM) 60%14%27%
Diana Shipping (NYS: DSX) 30%11%19%

Source: S&P Capital IQ.Paragon has been generating lower returns on equity than its peers over the past five years, while its debt has been in line with industry norms.

3. Management
CEO Michael Bodouroglou has been at the job since he founded the company in 2006. Before that, he'd worked in the shipping industry for a couple of decades..

4. Business
Shipping isn't particularly susceptible to technological disruption, though it can be quite cyclical.

The Foolish conclusion
Regardless of whether Buffett would ever buy Paragon, we've learned that, though it has tenured management and operates in a technological straightforward industry, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: stable earnings and high returns on equity with limited debt.

That being said, if you'd like to stay up to speed on the top news and analysis on Paragon to monitor the company's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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