Four Buffett-Inspired Picks That Could Outrun The Bulls


Disclosure: At the time of publication, John Reese and/or his private clients were long Tractor Supply Company, Gilead Sciences and Dow Chemical.

The annual “Running of the Bulls” is part of a nine-day festival held in Pamplona, Spain in which thousands of people attempt to outrun a small herd of bulls that are allowed to gallop frenetically through a series of small streets leading to a bullring, where the event ends. Some say the event originated in northeastern Spain during the early 14th century, when men would try to speed up the process of transporting cattle to market by spooking them into running.


The parallels with the current market environment, albeit hackneyed, are hard to ignore. The U.S. has been in a bull market since March 2009, and the world continues to watch and wait for signs of an end to what has been a great period for equity investors. Is it time to keep running ahead of the hoof beats or to jump the fence? Trying to stay ahead of the bulls can prove unfortunate (and sometimes bloody), but it can be hard to resist the excitement in the street (or on the Street, for that matter).

Conjecture abounds as analysts and researchers scour over historical data, trying to offer context and parallels with respect to similar periods in history. There seem to be as many opinions about when a bear will bust in as there are opinion-givers, some born out of political skittishness—think Comey testimony, Russia investigation, European elections, North Korea—others founded more on economic and market indicators (such as the famed CAPE ratio or Warren Buffett’s favored market cap-to-GDP ratio).


In a MarketWatch article published in May, Mark Hulbert wrote, “To be sure, many market timers for years now have been predictin g the end of this amazing bull market and so far, they’ve been wrong. So, there’s nothing particularly new about the recent spate of predictions that the bull market is about to end.”

To extend our metaphor, how does an investor avoid getting trampled? Certainly not by trying to outrun—or outsmart—the bulls.

Warren Buffett, a market guru that inspired one the stock screening models I created for Validea, would probably answer this question by advising investors to be prepared–to stick to business fundamentals rather than stock market trends when deciding what to buy. As he explained to Berkshire Hathaway investors back in 1992: “If we find a company we like, the level of the market will not really impact our decisions. “This is characteristically Buffett—to resist being swayed by ‘news,’ be it good or bad, staying focused on concrete metrics when making investment decisions. “The market,” says Buffett, “is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.”


Although Buffett has seen plenty of market ups and downs, his message remains steadfast: investors should look for companies with a competitive edge and focus on underlying operations using criteria that are readily available and easily measurable. He is a staunch advocate of staying within what he calls his Circle of Competence—sticking to what he knows and steering clear of what he doesn’t. In this year’s HBO documentary Becoming Warren Buffett, the legendary investor underscores the importance of disregarding information that doesn’t serve you as an investor. “Over the years,” Buffett quips, “you develop a lot of filters.”


Filters, however, should not be confused with blinders. If you’re going to run with the bulls, you have to keep track of where they are at any given moment. Buffett, an insatiable reader, believes in doing your homework before making an investment. By determining that a business is fundamentally sound, you can be confident in your decision, endure headlines and hysteria…and make it to the bull ring.

Using the stock screening models I created based on the investment philosophy of Warren Buffett and other guru investors, I have identified the following high-scoring stocks:


Tractor Supply Company (TSCO) is an operator of rural lifestyle retail stores in the U.S. that focus on supplying the needs of recreational farmers, ranchers, tradesmen and small businesses. The company earns a perfect score from my Warren Buffett-based screening model given its ability to pay off debt with earnings within two years as well as predictable earnings growth. Average return-on-equity over the last ten years of 22.6% well exceeds the minimum required by this model of 15%, and management’s use of retained earnings reflects a favorable return of 18.3%. My Lynch-inspired strategy also likes Tractor Supply’s ratio of price-earnings to growth in earnings-per-share (PEG ratio) of 0.93 and debt-equity ratio of 46.27% (equity is roughly double debt).


Must Read: 12 Stocks To Buy For The Se cond Half of 2017

Gilead Sciences (GILD) is a research-based biopharmaceutical company that discovers, develops and commercializes medicines in areas of unmet medical need. My Buffett-based model assigns high scores to the company in light of its ten-year average return-on-equity of 37.8%, more than double the minimum required level, and free cash flow-per-share of $9.92. Earnings predictability is a plus under this model, and management’s use of retained earnings reflects a favorable return of 25.1%. My Joel Greenblatt-inspired investment strategy favors Gilead’s earnings yield of 15.86%, which ranks the company 30th among the stocks in the Validea database.


Dow Chemical Company (DOW) manufactures and supplies products used primarily as raw materials for various other manufacturing applications. The company earns high marks from my James O’Shaughnessy-based stock screening model, which likes its size (market cap of $80.9 billion) as well as cash flow-per-share o f $6.40 compared to the market mean of $1.74. Trailing 12-month sales of $50.6 billion exceed the market average by more than 1.5 times, a plus under this model, and the dividend yield of 2.78% adds interest. My Lynch-based model favors Dow Chemical’s PEG ratio of 0.83 as well as the long-term EPS growth rate (based on 3-, 4- and 5-year averages) of 20.7%.

Snap-On (SNA) is a manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions that scores highly under my Lynch-inspired investment strategy due to its PEG ratio of 0.96 and earnings-per-share of $9.43. Total debt-to-equity of 37.22% passes this screen. My Greenblatt-based model favors Snap-On’s earnings yield of 9.84%.

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