John Buckingham, astute value stock picker, never curbs his enthusiasm for beaten-up, underperforming quality stocks. Take, for instance, his biggest winner ever — Apple, which he recommended in October 2000, only to see its price plummet three months later from a split-adjusted $1.60 to $1.06.
But the value manager held on patiently — and has indeed reaped substantial rewards: Today Apple trades at $310.
In an interview with ThinkAdvisor, the chief investment officer of Kovitz Investment Group’s AFAM division, discusses five dividend-paying stocks that have performed miserably since the end of 2018 but which, he argues, are poised to outperform in 2020. They were culled from a list of his 25 favorite laggards. The manager is betting that “a renaissance in value investing” is “around the corner.”
(Related: John Buckingham’s Top 8 Stock Picks for 2019)
Ever-upbeat on beaten-down equities, the editor of The Prudent Speculator newsletter — published for more than four decades now — forecasts that this year, stocks of the S&P 500 index could double in price from current levels and not be expensive.
Many of the 120 equities that he owns appreciated significantly in 2019. These include Lam Research, Target, Tyson Foods, Citi and Apple.
Buckingham has been manager of the Al Frank Fund (Valux) since its 1998 inception. Through Dec. 31, 2019, it posted an annualized return of 10.17% versus the S&P’s 7.61%.
ThinkAdvisor recently held a phone interview with the Aliso Viejo, California-based manager, who offered his forecast for the market and U.S. economy in 2020. He prides himself on being realistic.
Here are highlights:
THINKADVISOR: What are your expectations for the stock market this year?
JOHN BUCKINGHAM: Right now we’re at an all-time high. In 2020, we could double the current S&P 500 and be fairly priced.
What’s your reasoning?
Stocks aren’t overvalued at all because interest rates are at such historically low levels; and they’re likely to stay low for the foreseeable future, though we now see them trending up a bit. To be negative on stocks today, you have to either believe that interest rates will be significantly higher or that corporate profits will contract. Anyone who thinks we’re going to have a negative return on stocks this year is uber-bearish.
What market return do you anticipate?
An 8% return, which is actually very good, given the low interest-rate climate. Nine percent is what it’s been historically.
What’s your outlook for the economy?
Leading economic indicators and the Federal Reserve project about a 2% GDP growth rate, and I think 2% is probably a pretty good number. The economy will muddle along, which means no boom, no bust. The economy is kind of OK. It’s not Goldilocks — that is, it’s not “just right.” It’s just OK. But just OK is fine because I believe that stock prices have discounted something worse than just OK.
OK — why is the economy “just OK”? The backdrop seems really good — we have quote-unquote full employment and an historically low unemployment rate. Yet there isn’t a lot of traction being made on GDP. A lot of that is about cautious business investment.
What else makes the economy just OK? (This interview took place on Jan. 7, an hour before the first reports of Iran’s missile attacks on U.S. military bases.)
We have a presidential election coming up. We don’t know what the tax regime is going to be as we go forward. We don’t know what’s going to happen tradewise with China and with trade around the world. Things seem better than they were two or three months ago, but we’ve had an additional wild card of potential escalation of Middle East hostilities that could impact oil, which [in turn] can impact inflation, among other things.
What will be the effect of Iran’s near-certain retaliation for the U.S. killing their top general?
I don’t want to be cavalier, but if every time we worry about an event in the Middle East, we’re never going to invest. It’s been shown that there really wasn’t any negative impact [from] the 20 previous Middle East crisis events.
President Trump is unpredictable. What threat does that present to the market?
No matter who’s in the White House, no matter what events happen around the world, the equity markets and the fullness of time will prove to be rewarding, though not without ups and downs along the way.
You’re of course referring to volatility?
Yes. You have to be prepared for it. If you have a long-term time horizon and the stomach to ride through the ups and downs, remember that the secret to success in stocks is not to get scared out of them. It’s amazing how, with the fullness of time, things that seem dire become just blips on the radar.
What effect will the presidential election have on the stock market?
History shows that it doesn’t really matter who’s in the White House because stocks are going to do OK all the time.
What’s the biggest threat to the market this year?
The big threat is always the health of corporate profits because that’s what ultimately drives stock prices. It’s influenced by [concerns like] what if the economy slows down [and if in fact it does] and the upcoming and potential events I just mentioned.
What’s your specific forecast for earnings, then?
We’re expecting relatively modest growth of about 4% year over year. I don’t think corporate profits are going to explode on the upside, but I don’t see them contracting either. You don’t need tremendous growth because stocks are very inexpensive given the interest-rate climate.
The yield curve inversion last year was “a buy signal,” you write. Some would disagree. Please explain.
There’s no guarantee that the past is prologue; but whenever we had a yield curve inversion before, it was a very good sign that you should be buying stocks — not that you should be selling stocks, which of course the media told people to do. They said that the inverted yield curve showed that a recession was coming. Oops! They were absolutely wrong. It’s so easy to trade today: You click a button and sell your million dollars of S&P 500 ETF, or something. These are mistakes that can haunt you.
What impact do you think President Trump’s impeachment trial will have on the market?
None at all, really. I don’t worry about impeachment. We don’t even know that if he were convicted, it would be a bad thing or a good thing. Many people would argue it would be a good thing; others would argue, a bad thing because a lot of business-friendly things could potentially get reversed. But you just can’t sit there and say, “Well, let’s wait to figure it out.” The key point is that you have to be positioned in advance of the inevitable upturns because there will be downturns. And we can’t predict either.
For this article, you’ve chosen five stocks from a list of your 25 favorite laggards. In alphabetical order, please discuss the five, starting with Albemarle (ALB), a low-cost producer of lithium.
At present, there’s tremendous pricing pressure on the lithium market. Over the long haul, we think demand for lithium is going to grow significantly — because, for example, of the potential growth in electric vehicles, which use lithium batteries. Albemarle will participate in that. If you like Tesla but don’t want to pay a ridiculous price tag for a company that doesn’t make any money yet, here’s one that makes money, gets you a decent dividend and has growth potential you don’t have to pay for. Also, lithium is used in backup and storage batteries for the power grid. And Albemarle generates healthy profits too from bromine, primarily used in flame retardants, demand for which has risen for computer- [related products] and automobile electronics.
Corning (GLW), the leading designer and manufacturer of glass and ceramic [underlying layers] in liquid crystal displays, fiber optic cables, automobiles and laboratory products. Most of the quality names in technology, like Apple, Microsoft, Intel, have appreciated. But Corning has been a laggard. That creates opportunity. We think Corning would be the one to create the next big thing in glass. But you never know — so it’s nice that they have a diversified business.
You also like Goodyear Tire & Rubber Co. (GT).
Goodyear is a leading supplier of light vehicle tires, selling in two distinct markets: replacement and vehicle manufacture. We like management’s ongoing efforts to restructure factories in Europe, modernize infrastructure, reduce headcount and adjust production to higher-margin tires. Over the long run, GT should gain from structurally higher demand for tires in emerging markets, given the rise in new-vehicle sales as more people there reach the middle class.
And another company?
HollyFrontier (HFC), one of the largest independent petroleum refiners in the U.S. While refining margins can be volatile and unpredictable, we think the firm will benefit as low-sulfur fuel demand is buoyed by implementation of IMO 2020, the new antipollution standards [from the International Maritime Organization] to reduce sulfur in fuel oil. HFC has refinery capabilities to tailor its output toward higher-margin products. The refineries that can produce these are going to see a better demand, and HollyFrontier is one of those that can do it.
And the fifth?
Kohl’s (KSS). This family-oriented department store operator is making investments as it fights to remain a long-term survivor amidst the brick-and-mortar retail-sector carnage. To drive more foot traffic, they’ve partnered with Amazon to do returns. Kohl’s will box them up and ship them back to Amazon for you. For that privilege, you have to walk into the store — so it adds to foot traffic. Kohl’s management says traffic “has been and will continue to be the No. 1 priority” and that they’re seeing “really solid traffic in [their] stores from marketing efforts and the ramp-up of the Amazon Returns program.” So we’re optimistic about their initiatives to drive foot and online traffic to boost sales in the long term.
By the way, what did you see in Apple when you invested in it 20 years ago?
The iPhone was years from being introduced, and the iPod was a twinkle in Steve Jobs’ eye. What Apple had at that time was very low valuation metrics, a cash-rich balance sheet, a history of creating innovative products and a small but loyal customer base.
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