John Buckingham’s Top 5 Stock Picks for 2018

Now is the time to focus on value stocks, says canny stock picker John Buckingham, AFAM Capital’s chief investment officer, chief portfolio manager and editor of its “The Prudent Speculator” investment newsletter, dubbed this year by Barron’s “The little newsletter that crushed the market.”

In an interview with ThinkAdvisor, the value investor reveals his five top picks of undervalued stocks for 2018 and why he likes to buy equities that “Amazon has scared everybody out of,” as he puts it.

After a year in which growth stocks ruled, value will reassert its historical dominance in 2018, the result of an increasingly stronger economy and because amid rising interest rates, value has historically generated better returns than growth, according to Buckingham.

(Related: John Buckingham’s Top Stock Picks for Early 2017)

The asset manager, who is AFAM’s director of research, uses a proprietary screening mechanism that evaluates and ranks 3,000 companies.

“The Prudent Speculator,” tracked by Hulbert Financial Digest — and which Mark Hulbert calls “one of the most successful investment newsletters of the past four decades” — is, since its 1977 inception, up 17.9% annualized vs. the S&P 500’s 11.1%. The firm’s Al Frank Fund has outperformed since its 1998 launch, realizing an annualized rate of return of 10% vs. the S&P 500 at 7%.

All of Buckingham’s top picks for next year are likely to do well in the short run, he says. In part, they stand to benefit from increased earnings, anticipated as a result of the Trump tax package.

Indeed, corporate tax cuts will potentially help firms attain higher earnings, some of which are expected to be deployed to raise wages and for share buybacks, dividends and capital investment.

As a value investor loving beaten-down stocks, Buckingham remarks: “We’re happy that Amazon does what it does because it often creates opportunities in its wake.” For example, this past June, when the behemoth announced it would acquire Whole Foods, the stock of supermarket operator Kroger fell 10% in addition to a 15% drop a day earlier on an earnings warning. “So far, Kroger has done very well for us,” Buckingham says.

His top picks for next year reflect a broad diversification of inexpensive stocks that are trading at lower fundamental earnings multiples than they have historically or in relation to their peers.

ThinkAdvisor recently interviewed Buckingham, on the phone from AFAM offices in Aliso Viejo, California.

Here, in alphabetical order, are his five top picks for 2018 and what he has to say about them:

CAPITAL ONE (COF) — My primary focus is on the big credit card issuer’s lending business. Capital One hasn’t seen the gigantic appreciation of some other financial names; but it ranks very high in our scoring system. Earnings have been sensational of late, and there’s substantial potential for earnings growth. The stock is trading at 13 times earnings. Capital One pays a relatively high tax rate, in the 29% to 30% range.

The concerns about credit card companies are default and delinquency rates, but right now those are near historic lows. A stronger economy will offset the risk of higher interest rates and a greater default rate. And with firms potentially handing out bonuses to employees as a result of the tax cut — AT&T, for example — people probably will pay down their credit cards.

Capital One also benefits from a stronger economy because higher interest rates historically have been a favorable environment for financial firms.

FEDEX (FDX) — This is a GARP stock — growth at a reasonable price. If you believe that Amazon is going to continue to rule the world, they of course have to ship the stuff. No one can compete with FedEx in the ability to deliver packages and make a very handsome profit doing so. We think we’ll continue to see substantial growth from their business of delivering packages.

If you truly see e-commerce as a long-term trend, FedEx is certainly an excellent company to invest in.  Earnings that came out a few days ago were terrific and better than expected. They’re $12.30 on a trailing basis, and analysts are starting to ratchet up their numbers. I saw one estimate of over $20 a share by 2020.

Right now, the stock is trading at 20 times earnings, a little below the overall market. But forward multiples will come down considerably.

This company pays a very high tax rate also. In a conference call, [management] said that because of the tax cut, they’ll see a 30%-40% increase in earnings in the next year.