Some investors suspect that investment legend Warren Buffett has lost his touch and point to disappointing returns in recent years for Berkshire Hathaway, the company he controls. And yet, as the stock market faces new challenges, Buffett’s investment strategy may be just what you need.

Here’s why: The reason that Berkshire stock has lagged behind the S&P 500 Index over the past five- and 10-year periods is that Buffett’s value style of investing has been out of ­favor during the long bull market. He has continued to buy steady, high-­quality businesses at bargain prices and hold on to them for long periods, while many investors have shifted to sexier, faster-growing companies. However, sentiment has begun to shift as economic growth has slowed. Over the six months ending October 28, value stocks in the S&P 500 returned 6.3%, outperforming growth stocks in the index, which returned 2.8%, according to Morningstar ­Direct. 

Bottom Line Personal asked Buffett expert John Reese how our readers can take advantage of this shift and keep their portfolios growing but safe…

Buffett’s Criteria

Investors looking to Buffett for investment ideas don’t necessarily want to mimic his actual stock picks, which currently range from American Airlines to Wells Fargo. You’re better off using his style and criteria to create your own list of attractive stocks. 

Reason: As small investors, individuals have an advantage because they can ­invest in stocks of any size. Buffett’s $200 billion portfolio limits him to picking the stocks of mostly giant companies. 

I’ve studied Buffett’s investing style for more than 30 years and constructed an online tool that searches for stocks that fill all of the same criteria he uses to find attractive investments. The criteria include…

Good defense. Buffett looks for companies whose stocks have a history of low volatility. In other words, when the broad market falls, their stocks tend to fall less. 

Predictable growth and ­profitability. The companies should dominate their market niches and have business models that produce long, consistent histories of increasing their annual earnings.

Little or no long-term debt. The companies must have strong free cash flow and generate growth without ­having to borrow and face high interest payments. 

Long-term advantages over competitors. These advantages include patented technologies and/or trusted brand names. Buffett refers to these as “moats” because they protect a company’s profits and market share. 

My Favorite Buffett-Like Stocks for 2020

Below are five wonderful businesses that meet all of the above criteria—including having little or no debt—and rank high in my Buffett screen. ­Buffett doesn’t own any of these in his Berkshire Hathaway portfolio now—but he should. Buying one or more of these stocks can help lower your overall portfolio volatility in the next few years and provide solid long-term returns. 

F5 Networks (FFIV). Even though Buffett has largely avoided tech stocks, other than recent investments in ­Apple and Amazon.com, my screen has turned up some smaller, high-quality tech companies with long histories of profitability that are worth considering. These include this midsize hardware and software manufacturer. With the relentless growth of voice, data and video traffic through cyberspace, many companies find themselves facing digital traffic jams. Their websites and applications crash, hurting productivity and profits. F5 Networks’ products work with a company’s in-house or cloud-based computer servers to manage incoming and outgoing Internet traffic. It helps make websites and communication networks faster and more efficient for major clients ranging from Blue Cross Blue Shield and Major League Baseball to credit-score agency TransUnion and China Telecom. 

Medifast Inc. (MED). This pint-sized company manufactures and distributes weight-loss and healthy living products such as shakes, smoothies, food bars and cereal through stores, independent health advisers and weight-loss clinics. Specialty food products are among the fastest-growing categories in the $72 billion US weight-loss market. Medifast has several enduring advantages over the competition. The company, which was founded by a doctor and has its roots in developing diets for medical conditions, has no debt, unlike debt-laden competitors such as Weight Watchers, and it has been able to grow with little advertising thanks to word of mouth. The company’s best-selling Optavia brand of products relies on local health coaches who are current or former Medifast users to help new customers build meal plans and meet their weight goals. 

Novo Nordisk (NVO). Based in Denmark, this health-care giant is a leader in treating diabetes. Novo Nordisk controls almost one-third of the $50 billion global diabetes market with drugs that include top sellers such as NovoLog, an injectable insulin kit, and Victoza, a once-a-day insulin shot with the positive side effect of promoting weight loss. To fend off generic competition, Novo ­Nordisk plows about 15% of its sales annually back into research, creating a robust pipeline and allowing the company to expand into other profitable niches beyond diabetes care, such as hormone-replacement treatments. 

O’Reilly Automotive (ORLY). This automotive aftermarket parts supplier has more than 5,300 stores nationwide, up from 3,400 a decade ago. That makes it one of the dominant players in a market niche that has many years of growth ahead because people are hanging on to their cars longer. By 2023, about 84 million cars on the road will be at least 16 years old, a 22% increase since 2018. What makes O’Reilly unique in the industry is its ability to serve dual markets—selling to both do-it-yourselfers and professional car repairers—thanks to an industry-leading distribution network and a strong retail presence in 47 states.

TJX Companies (TJX). The ­company owns 4,400 off-price apparel and home retail stores including T.J. Maxx, Marshalls and HomeGoods, notching higher sales in each of the last 23 years, including through the 2007–2009 ­recession. The stores woo shoppers with promises of 20% to 60% off regular retail prices and a “treasure hunting” experience for consumers who never know what they’ll find. This strategy has proven resilient amid the retail apocalypse brought on by competition from Amazon.com and other online shopping sites. TJX is well-suited to keep growing in adverse economic conditions because a slowdown would create even more opportunities to acquire excess inventories at large discounts from full-price retailers.