"Equities have a way of climbing a wall of worry," Buckingham says.

Ace stock-picker John Buckingham’s market forecasts are often crystal-ball clear. So ThinkAdvisor went to the chief investment officer of Al Frank Asset Management for his take on how the first half of 2017 could roll out for investors and where opportunities may be found.

The value manager who loves tech cites widespread uncertainty about President Donald Trump’s plans as a reason for a likely near-term stock market pullback. For the full year, the long-term investor is bullish.

Buckingham has managed the Al Frank Fund since its 1998 inception. As of Dec. 31, it boasts an annualized total rate of return of 10.1% vs. 6.7% for the Russell 3000 Index. Last year the fund was up 15.62%.

In the interview, Buckingham, who oversees $650 million in AUM, shared his thinking on sectors and a variety of specific equities that he favors for the year.

We recently spoke by phone with the Aliso Viejo, California-based fund manager, editor of The Prudent Speculator newsletter and a Forbes blogger. Here are highlights from our conversation with the clear-sighted Buckingham:

THINKADVISOR: How will the presidency of Donald Trump affect securities markets in the first half of this year?

JOHN BUCKINGHAM: There has been a significant amount of good news that’s been discounted, but we’re not certain the good news will actually materialize. Therefore, I’m a little concerned about the near term: We might have a bit of a pullback. We don’t know yet what Trump is going to do. And — as I like to joke — I’m not sure he knows yet what he’s going to do.

What’s your general outlook for the market for the first half?

We might see more of a rotation out of fixed income and into equities, especially if the Fed continues to raise interest rates. Fixed income isn’t generating great returns, as was the case in the second half last year; but equities worked well. So we may see more interest in stocks as we move through 2017. By the end of June, we might be 4% or so higher than we are today — but we’ll have a lot of volatility along the way.

How will efforts to dismantle Obamacare affect the health care sector and the overall market?

Obamacare is a huge wild card. We don’t know what will materialize. But I think the reactions we’ve seen in many stocks are overdone compared to what actually will happen: My perception is that there’s going to be less of a change than people might think.

What’s a good investment strategy for health care, then?

The best, and the safer, way to play this is to look at the stocks that have already been hit hardest and see if those companies are likely to be hit as hard as the market is anticipating. Look at what’s been beaten up unfairly. We just added a medical device stock to our portfolio. We already owned [another one], Medronic. It had lost 20-some-odd percent of its value in a relatively short time, particularly on concerns about pricing going forward.

Many people are frightened because of all the uncertainty about Trump’s presidency. How will that affect their investing?

There’s always something to be worried about. But equities have a way of climbing a wall of worry. Eventually, investors are rewarded for investing in corporations that grow their top and bottom lines. Life goes on. At the end of the day, the economy grows roughly 3% over the long term, and stock prices do even better over the long haul. And for many folks, having a pro-business Congress and president is a positive, not a negative. Corporate profits are the most important thing.

What’s your forecast for earnings, then?

They’ll be better in 2017 than in 2016 — and that’s not even factoring in potential tax breaks for corporate America, whether repatriation of money held overseas or a lower tax rate, as has been articulated throughout the Trump campaign, which would obviously improve net earnings. Last year the energy sector was a big drag on profits because of the significant plunge in oil prices from 2015. Without that drag this year, even if the rest of the sectors just muddle along, you have a much improved profit outlook, which is positive for equities. What could happen in the bond market?

We’ve been in a 30-year bond bull market. Eventually, you’re going to see that reverse. Bonds aren’t where you want to put your money [now]. I don’t think that market will collapse — that you’ll lose 10%; but there might be modestly negative returns on traditional fixed-income investments. That’s one reason I think stocks are appealing: Some of these incremental dollars are going to move out of bonds and over to stocks, which will be important for the market.

What are your thoughts about inflation?

I don’t see inflation being a huge issue. We’re not even at 2%. Inflation will remain under control. There are still a lot of people who aren’t in the job market who would like to be. While we just saw some decent numbers on wage growth, I don’t know that those are going to lead to significant inflation.

History has shown that since World War II, there has been a recession during the first term of every Republican president. What’s that possibility with Trump?

I don’t think there’s any chance, barring some outside event, of a recession this year. To have an official recession, you need two quarters of retraction; and I just don’t see that happening. Historical precedents don’t always hold true. I think we’re going to be a little better than the Federal Reserve is suggesting. I estimate 2-1/2% to 3% growth for the year, which would be a favorable backdrop for corporate profits.

What’s the likelihood of a market correction this year?

If you mean a 10% decline, those happen at least once a year. So the likelihood is very high. The fact that stocks had such a good 2016 creates the likelihood of a pullback. We haven’t had a significant pullback in 11 months, so we’re probably due for one. But the fact that corporate profits are likely to grow this year has decreased the risk because stock prices generally follow profits.

Will capital spending finally increase?

We see a little more optimism out of corporations. There’s more willingness in the executive suite to believe that the regulatory climate and taxes might be less onerous going forward. So, with less pessimism, you’re likely to see greater capital spending; and that, combined with a healthier economy [will mean] corporate profits will benefit from top-line growth, which we haven’t seen in several years.

What’s the biggest threat to the market this year?

If we don’t get corporate profit growth, that’s certainly a big threat. I don’t see the Fed’s being problematic in terms of raising rates faster. [But] that kind of environment is actually very positive for value stocks. Last year, value outperformed growth by a wide margin. I think that value will prove its outperformance last year wasn’t a fluke and that it will do much better as we go forward.

What sectors and stocks do you like for this year?

We’re overweight in consumer discretionary. We see some great opportunities in super-high quality blue-chip companies that are reasonably priced: core holdings like Walt Disney and Nike. We also like the cruise industry demographics-wise. We think having a cruise operator as a core holding makes sense. There are plenty of growth catalysts there. Valuations are reasonable on Royal Caribbean and Carnival Cruises.    What about retail? That sector hasn’t done very well lately.

There’s been overreaction to earnings disappointments — a lot more bad news discounted than what is actually likely to occur. Department stores got crushed. So — we like Kohl’s, which has a dividend yield of close to 5% and a P/E of about $11. We like American Eagle Outfitters, an apparel retailer for 15- to 25-year-olds. It has no debt, an inexpensive valuation and a nice dividend yield.

What other sectors do you favor?

Health care. Drug company stock prices are trading at some of the lowest levels ever. For instance, something like an Amgen, which is yielding 3% and has a P/E of $13 and has a great pipeline of drugs to come and a fantastic balance sheet. Gilead Sciences is another that’s very attractively valued in a market that’s fairly valued by many measures. Drug companies have historically raised prices far faster than inflation; but, in all likelihood, that’s not going to be the case going forward, and valuations on the stocks are discounting significantly.

Do you like big pharma too?

Yes, something like Johnson & Johnson, Merck or Pfizer are attractively priced. 

Where do you stand when it comes to the energy sector?

Energy stocks have rebounded significantly, but we’re not yet seeing bottom lines improve as much as we’d like, so we’ve not added to our energy exposure. Our exposure is in the major integrated oil companies, like Exxon, Royal Dutch and Total. They’re reasonably priced and have nice dividend yields.

What about oil services?

We’re sticking with the higher quality names, given that we’re not convinced yet we’re out of the nuclear winter as far as capital spending goes in energy. We like Schlumberger, Baker Hughes and Halliburton. From a price-to-sales and price-to-book standpoint, they’re attractive. Schlumberger, which we just bought in the last month or so, is also attractive from a dividend yield standpoint.

What do you like in technology?

Approximately 20% of our portfolio is in tech. So we have a significant commitment to tech; and we think that the bigger cap names, like Apple, Microsoft, Intel, Oracle, Cisco and Qualcomm are all very attractive. 

How much do you like financials?

We like them better now that interest rates have risen. We have exposure in insurance companies, like Prudential, Travelers, Allstate and MetLife. They’ve done very well over the last couple of quarters, yet their valuations were so depressed prior to that they’re still not at the point where we’d say they’re richly valued.

How about the big banks?

Still worth holding. But in terms of adding new dollars to them, we’d like to see a bit of a bigger pullback. We’re watching a couple of names. Banks have done very well — they certainly helped value managers outperform last year — and we participated happily with stocks like Bank of America, JPMorgan and Wells Fargo, whose stock [despite company scandal] has actually appreciated significantly.

You’ve written that you’re sticking with some stocks that performed poorly last year. Please explain why.

There’s still value in those stocks that’s yet to be recognized by the market. So the last thing we’d want to do is sell them. If anything, we want to be adding to the areas that haven’t performed. What’s your outlook for emerging markets?

Many of the companies we invest in do business abroad. I’d rather get emerging market exposure through [such] multinational companies [than from individual countries]. For example, a lot of the tech names we [own] have exposure overseas. The liquidity of U.S. companies is still the best in the world. Accounting standards are certainly a lot better here than they are around the world. And if you invest abroad, you have issues of currency [added] to the equation, which makes it a little difficult for the average investor to be successful.

How will the strong dollar affect the stock market?

That’s another potential headwind for blue chips, many of which do business overseas. But we’ve seen a strong dollar here for the last couple of years, and yet corporate profits have been improving. The dollar is a big issue, but I don’t think we’re going to see dramatic changes in terms of the value of the dollar from where it is today.

Why isn’t there more focus currently on the national debt?

At some point, you have to pay the piper. But right now interest rates are extraordinarily low, and that’s another positive. I don’t see a whole lot of reason to be concerned even though, as [the deficit] continues to grow, it’s something we discount long term. The amazing thing is that in times of turmoil — as in the last six to eight years — investors have gravitated toward the U.S. Treasury as their safe haven, their disaster instrument. And that, of course, lowers the cost of rolling over our debt. I don’t see that changing anytime soon. For the short run, [the deficit] is not an issue.

But in rebuilding the country’s infrastructure, for example — President Trump said that was one of his intentions — isn’t that robbing Peter to pay Paul?

Right. But greater economic growth will help pay for all of this. You’re going to take some of the shackles off corporations. And they’ll invest more and hire more and earn money and spend money and pay taxes — it will be a win-win for everybody. We’ve had miserable economic growth for a decade, and that’s why I’m not concerned about a recession occurring in the first year of Trump’s presidency. We’re long overdue for [substantial] growth. But it’s not as simple as saying Trump can’t pull this off because there are only X dollars that we can invest and it’s only going to produce Y. When you look at the economy, it’s not as simple as an “if A, then B,” analysis. 

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