John Buckingham’s Top Stock Picks for Early 2017

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.