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How Ace Stock Picker John Buckingham Reacted to GameStop Squeeze

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FedEx, CVS Health and Cisco Systems: What do these three stocks have in common? They’re all value equities whose appeal has been heightened by the coronavirus pandemic. Also, they’re among top stock picker John Buckingham’s favorite plays for 2021, as he tells ThinkAdvisor in an interview.

With value stocks coming into vogue again, value investor and perma-bull Buckingham, principal and portfolio manager of wealth management firm Kovitz, and longtime editor of The Prudent Speculator newsletter, is perhaps even more optimistic about the market now than usual.

Certainly the freakish frenzy of the GameStop short squeeze last week that triggered high volatility didn’t faze the fund manager.

In fact, “nothing in my long-term optimistic outlook has changed as a result of [the] craziness. Doubtless, there’ll be fallout, and many will end up with big losses. But I’m thrilled that a new generation of investors is coming to understand the merits of investing,” says Buckingham, who is based in Aliso Viejo, California.

With signs pointing to a market rotation from growth to value since last July, the opportunities are clearly in undervalued equites, he maintains.

In the interview, he discusses sectors and specific stocks that he likes, including why he prefers CVS over Walgreens, both set to administer COVD-19 vaccines.

Buckingham, managing investments for more than 30 years, has been manager of the Al Frank Fund (VALUX) since its inception in 1998. Through Dec. 31, 2020, it has posted an annualized return of 10.16% versus the S&P 500’s 8.06% and versus the Russell 3000 Value Index’s return of 7.26%.

ThinkAdvisor held a phone interview with Buckingham, speaking from his home in Laguna Beach, California, on Jan. 14, with email exchanges following on the 27th and 29th.

Here are highlights of our conversations:

THINKADVISOR: What’s one unloved value stock you’re invested in that recently went up?

JOHN BUCKINGHAM: Over the years, we’ve done extraordinarily well with Royal Caribbean Cruise Lines. Obviously, it’s not as high as it was pre-pandemic. But it was at a low of $20, and now it’s in the $70s. This is a lesson to investors who said, “I’m not going to invest in the cruise-line space because nobody is going to cruise again.” 

Please discuss your investing strategy.

We’re value investors — trying to buy things that nobody else likes; then, when people fall in love with them, we [sell] those stocks at much higher prices. If CNBC is saying the market’s in turmoil and Jim Cramer tells you the world is ending, that’s when you want to mortgage everything and buy hand-over-fist because you’ll go against what the masses are doing.

Is the market undergoing a rotation to value stocks?

It started last July. In 2020, a lot of money piled into growth stocks; now we’re seeing a reversal of that, as well as some money coming out of bonds. There’s also a ton of money still sitting on the sidelines that’s looking for a home.  

What triggered the rotation to value?

The COVID-19 vaccine is the primary catalyst because the economy will be doing better as we all, hopefully, get vaccinated and the pandemic starts to fade.

What’s your outlook for value equities, then?

They’re still really attractively priced relative to growth stocks. I’m not predicting it will be like the busting of the tech bubble when the market tanked in 2000, 2001 and 2002. However, the average stock did just fine then. We made a lot of money in that time span.  

Because of the GameStop and Robinhood short-squeeze hysteria last week, on Wednesday and Friday the market saw sharp sell-offs. How did all that affect your bullish market forecast?

Nothing in my optimistic outlook for the long-term prospects of our broadly diversified portfolio of undervalued stocks has changed as a result of that volatility. Volatility is the friend of long-term value buyers, and it can also afford opportunities to take profits when stocks move a little too far upward. 

Did you make any moves on Wednesday?

Some of our stellar performers pulled back a bit, but we were able to take some money off the table on three names that ran rapidly higher. We thought it prudent to let the “herd” have a few of our shares in Nordstrom (JWN), Seagate Technology (STX) and Viacom (VIAC).

What good, in general, may have come out of the GameStop madness?

I’m thrilled that a new generation of investors is coming to understand the merits of investing. Many will end up with big losses, as the valuations on a number of the stocks they fancy are divorced from fundamentals; and many view the stock market as a casino or video game.

But history shows that equity prices, on average, appreciate over time. So those that stay in the game — and properly diversify — have the odds working in their favor.

What are your expectations for earnings growth this year?

We believe there’ll be a much better economic environment. Many value stocks had an awful 2020 — their businesses were severely challenged by the pandemic. So earnings growth is another catalyst for value stocks, in particular.

With the reopening of the economy and a lot of demand for all sorts of things, we might even expect greater than 4.2% GDP growth, which is what the Fed projected before the Georgia [Senate runoff] elections.

What are the sectors and some examples of stocks that you like for 2021? 

We like the financials — such as JPMorgan Chase [JPM]; consumer discretionary; retail stocks like Foot Locker [FL] and Big Lots [BIG] since consumers are going to start spending much more than they have been.

What else do you favor?

With regard to working at home and the continuing focus on the home, people are going to buy more [merchandise] online and have it shipped to them. The pandemic has accelerated a lot of such trends that might have taken 10 years to happen — and these trends will continue.

What’s an example of a stock you like related to home delivery?

FedEx [FDX], a package delivery company that’s categorized as an industrial. It has benefited mightily from all the online shopping and will continue to do so. It’s trading at a very reasonable price. Other industrials that we like include Caterpillar [CAT], Eaton [ETN] and Cummins [CMI].

What about the technology sector?

Tech is an obvious beneficiary. We like Cisco Systems [CSCO] because they make a lot of the hardware that’s needed to work online to conduct commerce from home. And we like data storage company Seagate Technology. Both are very reasonably valued, plus we get divided yields with them.     

What are your thoughts about the health sector?

Both CVS and Walgreens are participating in the rollout of COVID-19 vaccines. CVS Health Corp. [CVS] is my choice. It runs the gamut as far as health care goes. It’s trading at a very reasonable price and always has a generous dividend yield. In addition to the pharmacies, CVS has a pharmacy benefit management company as well as Aetna managed care.

Broadly, the market soared during Donald Trump’s presidency. How do you expect it to fare under President Joe Biden?

Historically, stocks do better when there’s a Democratic administration versus Republican. Value stocks do terrifically under Democratic administrations.

Throw in a Democratically controlled Congress — Vice President Kamala Harris will be the tiebreaker — and that also favors equities, value stocks in particular.

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

First and foremost, not getting the pandemic under control in the time frame the market is anticipating. If we can’t do that, then the economy won’t grow as fast and earnings won’t be [very] good. This will mushroom to create a headwind for the stock market. 

What’s the second-biggest threat?

The geopolitical climate. We’re already hearing saber-rattling out of North Korea, and the Middle East is always a powder keg. China is a very big concern. There’ll be some real tests for the Biden administration. 

What do you forecast for the 2021 economy when it comes to interest rates and inflation?

I expect interest rates to continue rising somewhat, as well as rising inflation, which favors value stocks. Higher inflation favors a rebounding economy emerging from recession.

Please elaborate on your thoughts about inflation.

I’m not projecting significant inflation, though the Federal Reserve is trying to do all they can to raise the inflation level. If we’re going to have more stimulus coming from the Democratic Congress and the White House, that’s likely to be somewhat inflationary too. 

What’s your best advice to FAs on how to help clients during this challenging time?

The hope is that, when the market cratered last spring, advisors altered their clients’ allocations by taking money out of safer investments and putting it into risker ones.

As the market has rebounded, now is the time for those who have been overloaded in some of the big winners — growthier stocks — to take money out of them and put it into value stocks because that’s where the opportunities reside.  

Why is it important for advisors to guide clients this way?

Keeping clients from being their own worst enemy is the reason the financial advisor community should exist. The emotional part of investing is so challenging. The majority of investors don’t have the capacity to buy, patiently hold and then reallocate.

What’s a pressing need for FAs to fill going forward?

There are many disconcerting events that this country will continue to go through. Clients need professional [financial] advisors who will provide a calming influence when they want to make that potentially awful decision to bail out of stocks.

But my big regret is that sometimes you can’t talk people out of doing that. However, this is what makes the stock market. 

How so?

If everyone were bullish like me, we wouldn’t have opportunities. We [value investors] want people to be pessimistic and compulsive and overreact because that allows us to do what we do.

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