Whether the market goes up, down or sideways

How do you invest in a tempting but volatile stock market? Try emulating Warren Buffett, the legendary investor and CEO of Berkshire Hathaway. He ignores the broad market and instead uses stringent criteria to pick high-quality companies whose stocks are selling at a discount. That strategy provides you with the opportunity for long-term gains but affords some protection should the market retreat.

To help you find Buffett-like picks, Bottom Line/Personal spoke with John Reese, who has made a career out of analyzing investments by Buffett and other legendary investors…


My computer stock-screening method incorporates more than 40 years of Warren Buffett’s annual reports and other research on how he selects his boring-yet-reliable stocks. Since its 2003 inception, my 10-stock Buffett portfolio has had a cumulative return of 88% (an average of 7% annually) versus 53% (4% annually) for the Standard & Poor’s 500 stock index. Over the same period, Buffett’s own Berkshire Hathaway stock had a total return of 106%. But small investors have somewhat of an advantage now. Buffett has stated candidly that his company and its investment portfolio are so large that he can no longer invest in stellar small companies and achieve the outsized returns of the past. As a small investor, however, you can own shares in and potentially profit from these companies. My Buffett stock-screen criteria include…

  • Protection from losses. Buffett invests in companies that have strong brand-name products whose sales hold up well in troubled times. In downturns, these stocks typically fall by much less than the S&P 500.
  • Predictable growth. Buffett looks for companies that dominate their industries and can increase their earnings year after year for decades.
  • Little or no long-term debt. This gives businesses enormous financial flexibility, especially in the next several years, when rising interest rates will make interest payments burdensome.
  • Shareholder-friendly management. Buffett likes CEOs who make moves that benefit investors, such as buying back shares with excess corporate cash and making shrewd acquisitions.
  • An economic moat. This is Buffett’s term for some kind of lasting advantage that a company has over its competitors, such as a patent on a product, a unique business model or a trusted name.


Bed Bath & Beyond (BBBY). Buffett loves investing in businesses with strong profits and steady growth that are suffering a temporary setback and depressed stock price. This retailer, with nearly 1,500 stores and more than $10 billion in annual sales, controls an estimated 9% of the total domestic home-furnishings market. Its share price fell 4% last year while most stocks that are connected to the improving housing sector soared. Investors feared that online retailers such as Amazon.com were capturing market share and worried about slowing fourth-quarter sales (mostly due to the aftermath of Superstorm Sandy). However, Buffett would focus on the long-term picture: Bed Bath & Beyond is a company with no long-term debt whose stock is trading at a substantial discount to that of retailers such as Costco and Target…enough free cash flow to spend about $800 million in each of the next three years to buy back another 15% of its stock…and smart management that has positioned the company for additional expansion with the construction of a major e-commerce fulfillment center in Georgia. Recent share price: $76.74.

C.H. Robinson Worldwide (CHRW). This shipping logistics and freight company handles more than 10 million shipments and earns more than $11 billion in revenue without owning a single truck, plane, ship or train. Instead, the company uses its supply-chain expertise to contract with tens of thousands of mom-and-pop operations (more than 95% of US trucking companies operate fewer than 20 trucks). The company’s immense network and buying power allow it to negotiate lower prices for clients than competitors are able to offer. Earnings have increased every year for the past decade at an annualized rate of about 17%. Recent share price: $57.87.

FactSet Research Systems (FDS) often tops my Buffett-inspired stock screen, but with just a $4.5 billion market capitalization, it is far too small to attract Buffett’s attention. The company provides global financial and economic data to thousands of investment professionals. FactSet, which charges about $50,000 annually for a basic Internet subscription, has carved out a lucrative niche in the highly competitive financial-information industry by aggregating and repackaging data from more than 50 research firms and providing its own proprietary research that helps money managers analyze client portfolios. Buffett is drawn to industries with solid long-term prospects, and the insatiable appetite investors have for financial data is only going to increase. Although the company’s US business can fluctuate with employment trends on Wall Street and the amount of assets clients oversee, management has buffered slumps by diversifying internationally. Last year, overseas clients constituted one-third of its revenue. Recent share price: $107.46.

Hormel Foods (HRL). Buffett is a fan of powerful global brands, and it doesn’t get more iconic than this 122-year-old lunch giant. Hormel dominates the meat-oriented packaged-food sector with products such as Dinty Moore beef stew, Country Crock side dishes, Hormel Chili and Spam. While Spam may be the butt of jokes, a can is purchased somewhere in the world every three seconds of every day. Hormel, which earned $8 billion in revenues last year, has such reliable cash flow that it has been able to increase its annual dividend for 47 consecutive years. In down markets, its stock typically has fallen less than half as much as the S&P 500. This past January, Hormel took a big step in broadening its lineup by acquiring Skippy peanut butter for $700 million. Skippy, which is the leading peanut butter in China, provides Hormel with a strong platform to grow international sales. Recent share price: $40.98.

Varian Medical Systems (VAR), the leading manufacturer of systems for treating cancer with radiation therapy, sells to hospitals, cancer clinics and health agencies. It has perhaps the strongest economic moat of any company in my Buffett screen, controlling roughly 60% of the global market for linear accelerators—large machines that beam high-energy X-rays into tumors. There are steep barriers for competitors because this type of business requires extensive regulatory approval, and customer retention is high. The machinery is so expensive that hospitals would rather upgrade than buy a competing system. Despite the reduction in hospital budgets during the recession and concerns about cuts in Medicare reimbursement rates for radiation procedures, Varian hasn’t had a down year in revenues or earnings for more than a decade. And it can expect reliable growth for many years. Recent share price: $69.35.

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