Value investor John Buckingham. (Photo: Andrew Collins) Value investor John Buckingham. (Photo: Andrew Collins)

As exceptionally fast and sudden as the February-March market decline of more than 30% was, compared with other bear markets it was average in size — and perhaps 80% of the worst of the downturn is over, suggests ace stock picker John Buckingham in an interview with ThinkAdvisor. The fund manager has been buying equities throughout the upheaval.

Buckingham, chief investment officer of Kovitz Investment Group’s AFAM division, is characteristically bullish for the long term but clearly braced for further market decline in the short term, depending on the unpredictable course the coronavirus pandemic takes.

In the interview, the Aliso Viejo, California-based manager reveals market sectors in which he has bought equities new to his portfolios, where he also made consolidating swaps (think oil). In addition, he names eight of his larger holdings (think diversification).

Further, he opines on the trajectory of a potential market recovery (think turbulence).

The editor of The Prudent Speculator newsletter, 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 interviewed Buckingham by phone on March 26. The long-term oriented manager unsurprisingly argues that now is indeed a perfect time for long-term investors to increase their equity exposure.

Here are highlights of our interview:

THINKADVISOR: Have you been buying stocks during the downturn?

JOHN BUCKINGHAM: We’ve been buying all through it. With some cash that we had, we’ve been adding to our portfolios. We still have a modest amount of cash left; so I’m waiting to see if there’s another leg down, or maybe a downturn in a particular industry that’s affected, which will allow us to deploy the rest of our cash.

What’s the biggest challenge to stock-picking right now? 

All the analysts, including us, are trying to figure out how to model valuations of companies that may not have any revenue for a quarter or two — for example, going from having maybe $3 billion in revenue to $300 million. That wasn’t something analysts modeled. So rather than looking at what earnings will be, it’s: Can this company make it through to the other side, and how long will the economy be closed?

What stocks have you bought over the last month or so?

They include Lockheed Martin (LMT), 3M (MMM) and Pinnacle West Capital (PNW). We’ve also bought a couple of other stocks in the last two weeks or so that [we didn’t own before], but they haven’t been disclosed yet to readers of our Prudent Speculator [investment] newsletter. So because of compliance reasons, I can’t state those names now. They’re in the financials and industrials sectors, the areas that have been hit hard. So we’ve added exposure there.

How else have you adjusted your portfolios?

We’ve made some swaps. For instance, in the energy space, we consolidated out of oil service stocks and moved those dollars into integrated oil stocks Exxon Mobil and Total. Those are the two stocks in which we’re concentrated in terms of energy exposure.

Why did you make that move?

When the price of oil is $25 a barrel or even lower [as it has been], we’re concerned that the Halliburtons and Schlumbergers [of the world] aren’t going to make it to the other side; and we’d rather focus our attention on the integrated oil companies that have fantastic credit ratings and access to capital, which are going to make it through without likelihood of eliminating their dividends. [Therefore], we sold National Oilwell Varco, Royal Dutch Shell, Halliburton and Schlumberger.

If an individual with money to invest asked which stocks to buy, what would you tell them?

Here are eight that we own and like: Apple (AAPL), Google (GOOG), General Dynamics (GD), Target (TGT), Merck (MRK), Disney (DIS), Abbott Labs (ABT) and JPMorgan (JPM). They’re some of our larger holdings, but we didn’t go out and add to them. We’ve been buying new names only.

Do you think we’ve seen the bottom of the decline? 

If I were a betting person, I’d say that maybe 80% of the worst has been seen — but anything can happen. We always have to be braced for more downside. I would never say, “Don’t worry! Be happy!”

It seems as if this bear market has been rougher than most. Is that so?

The magnitude of the decline — about 34%-35% — is normal; the speed of the decline is what’s abnormal. It happened so quickly. Many individual stocks were down 70% or 80%, depending on the industry. The overall market, which was down about 35%, did better than the average stock, which got crushed, having lost about 40% from Feb. 19 through the bottom [to date]. But in the financial crisis of 2008-2009, from peak to trough the average stock was down even more: 55%.

Is your plan to continue to buy?

If we start to see thousands of [more] people dying of COVID-19 every day in the U.S. and it doesn’t look like the curve is flattening, then [the market] could go down further. But that doesn’t mean you don’t buy today. Nobody knows the future. The upside is far greater than the downside.

What caused last week’s market rally?

The catalyst was the idea that there’s an end to this economic collapse and that maybe we’ll avoid a Great Depression as a result of the Fed keeping the markets functioning and Congress passing the stimulus bill, which will get money in people’s hands to tide them over so we don’t have anarchy — people shooting each other because they can’t get toilet paper! And there was the talk of reopening the economy at some point.

When I interviewed you this past January, you were very bullish, particularly about value stocks, your specialty. What’s your mindset now?

I’m still very bullish about the long term. I think that stocks will be significantly higher in a year, three years, five years from now versus where we are today. We’ll get through this. We’ve survived everything — 9/11, the financial crisis of 2008, the crash of 1987 and other massive downturns.

How frequently do bear markets occur?

Every 3.5 years, on average. This is the sixth bear market of my career. In magnitude, it’s been average. On Monday [March 23], on a closing basis the market was down about 34%.

Is the market as a whole behaving as if the worst of the pandemic is behind us?

To say that the markets will go off to the races is hard for me to believe. I think we’ll have some backing and filling. Anything can happen in the short run. In my mind, the news about the virus isn’t going to get better in the next couple of weeks. That’s why we [still] have a little bit of cash.

What’s your specific forecast for a recovery?

From what I understand, there will likely be another wave of the virus — we won’t just get through this one, and then it’s all gone. It will likely recur, especially if we reopen the economy. So to think that we’re going to go in a straight “V” isn’t the case. I would say a “W” shape. We’ll have a big down and then maybe another leg down and then another leg back up.

Sounds uniquely challenging.

Economically speaking, it’s going to be very turbulent as companies bring people back and we figure out how to navigate a world of social distancing. There are a lot of questions that remain to be answered.

What broad advice have you for individual investors right now?

The hope is that people, at some non-emotional time, set their asset allocation mix correctly and thought about how much they need to keep in reserve. My clients have that mastered. The important thing is for people to understand how much they need to pay bills, for rainy-day money and for sleep-at-night money. Those are short-term and intermediate needs.

What about small-business owners? 

Likely, they’ve never even envisioned that they wouldn’t be in business tomorrow. So maybe they can lighten up on their portfolios because their short-term needs have changed.

What’s your advice for people who have a long-term three-to-five year — or longer — time horizon?

This is a great time to be adding to equity exposure. If your fixed income exposure has increased significantly as a result of stocks going down and bonds are either treading water or going up, moving money from fixed income into stocks that are truly long-term in nature makes perfect sense.

Why?

Because given the decline we’ve had in stocks, this is when you’d want to be moving more money of your long-term pie over to stocks.

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