Is Individual Stock Picking Dead? Buckingham Responds


November 8, 2016

The following is a transcription of Carol Massar and Cory Johnson interviewing John Buckingham on Bloomberg Radio. The interview took place on October 18, 2016 in New York.

Highlights from interview

  • There will always be a market for individual stock pickers
  • “We’re overweight in technology” because of long term growth potential
  • If you want to be a C student, and be mediocre, then get the index.
  • Many investors have gravitated toward Utilities, Telecom & REITs. They aren’t inexpensive and we are always looking for value stocks which seems to be in technology stocks now.
  • Seeing opportunity in large caps now. Not as much in small and mid-cap stocks.
  • Why AFAM doesn’t hold Alphabet – “We try to be disciplined. We want to stay focused on what has worked for us over the years.”
  • Short term issues hitting cruise industry

Announcer: This is Bloomberg Markets with Carol Massar and Cory Johnson on Bloomberg Radio.

Cory Johnson: Is stock picking your thing? Then maybe John Buckingham is your person. He’s Chief Investment Officer at Al Frank Asset Management. Normally in Laguna Beach; sensibly went to New York City when it’s 80 degrees out. Good work John. I’ll be there next week when it’s back to 50 degrees. But I got an alert from a rival news service announcing on my phone that the days of stock picking are dead. I just thought of years of bad business journalism, and I’ve seen that call made many times. But with the rise of ETFs, with long-short managers just putting exposure on using ETFs and indices with fees coming down, is that true? Is the day of the stock picker dead?

JB: Well, obviously I don’t think so given that I’m a stock picker. I’ve been at this for quite a while now, 29 years or so. I’ve heard it many times before, in the late 90s. That we had the new economy, that it was always something that would be a new mouse trap, if you will. But, at the end of the day, valuations matter. At the end of the day you want to buy stocks, at least in our view, that are on sale, and you want to sell them when the rest of the market has recognized that value.

I still think that there’s a market, no pun intended, for what we do. Yes, you can buy ETFs that get very granular and focus on value, but we of course have our own brand of value. We publish The Prudent Speculator newsletter, and it has done extremely well over the 39 years it has been in publication. I think there’s always going to be a market for individual stock pickers. I always look at it like: do you want to be a C student, and be mediocre, and then get the index, or do you want to try to be an A student? Over time, I think we’ve been an A student.

R: You’re very much focused, it seems, on big caps. Is that fair to say?

JB: Well, we go where [we believe] the bargains are. In years gone by, many moons ago, we were certainly focused on small and mid-cap stocks, as those were attractive, say in the late 90s. But small and mid-caps did really well during the last decade, 2000 to 2010, whereas large caps lagged behind. So we do find a lot of value these days in larger cap stocks, although we also find some in small and mid-caps. So we’re equal opportunity stock pickers. But these days, given where we are in terms of the interest rate climate, and that larger cap stocks generally have higher dividend yields, I think that a focus on large cap stocks, which are relatively attractively priced, is the way to go right now. But time will tell if that is the case down the road.

R: I prefer to use time will tell for when I’m on TV, and don’t know what I’m going to say next. Time will tell. So don’t steal my line dude! So as we look at those large caps though, it is curious.I wonder how important dividends are to you. We certainly see among a certain investor class an obsession with dividend paying stocks right now.

JB: Well first and foremost, we’re value investors, and we want to buy undervalued stocks. Secondarily, dividend income is important to us. But we’re not targeting the highest yielding companies out there. We have very low exposure to utilities, to telecom, to REITs, a lot of areas that in our mind many investors have gravitated toward, and frankly, the stocks there aren’t very inexpensive. So again, we want to go where the opportunities are. Technology is a very strong focus for us. We think financials, consumer discretionary… those are areas where we think there is a lot of opportunity. Again, that’s why you want to be an active manager, in my mind, and not passive. Because if you’re passive, you’re going to be stuck with the utilities, and things that may not be attractively priced today.

The Case for Value Investing

We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.

Download The Case for Value Investing

R: Let me run through a couple top holders. You mentioned technology, among your top 15 holdings. Going from bottom to top, I see Cisco, I see Intel, I see Microsoft, I see Apple. Among those, what I’m most interested in right now is Intel, not least of which is because I’m going to be talking to Stacy Smith in just a little bit. Help me out, what should I ask him when I have him on the show in a little bit?

JB: Well, obviously the concern about Intel is the health of the PC market, and is it a dinosaur. Everybody seems to think that it’s heading the way of the beast. But we haven’t seen that particular industry die. So I think there still is life in the PC, and obviously Intel has done a good job of evolving. Most importantly for us though, it always comes down to valuation. I know we want companies to grow, don’t get me wrong, and Intel is going to post some modest growth in our opinion over the next few years. But valuation rise in stock is a below market multiple, and an above market yield. Those are attractive in our mind.

R: Dividend yields you mean.

JB: Yeah, exactly. Dividend yields.

R: As you look at that business throughout, I mean these are businesses that are all competitors. Intel itself has been doing a lot of acquisitions. I wonder how you see that management or buying growth, because the market isn’t providing it.

JB: Keep in mind that these companies are in the technology space, and growth is paramount. The market doesn’t seem to like, at least in the short run here anyway, when you’re trading at a P/E of 11 or 12. I’m not really attracted to you. But if you can somehow be in earnings expectations, or revenue expectations, and if you have to buy it to do that, so be it. The nice thing is most of the big tech companies have a great balance sheet with lots of cash, and they have that ability to make those acquisitions. So we’re fine if they can grow via acquisition. Ultimately, the hope is they do get a higher multiple. That’s the bizarre thing these days, is that big cap tech is generally trading for below market multiples.

R: I know.

JB: And again, has a better balance sheet than the average stock, has higher dividend yields than the average stock, and frankly has better growth potential over the long haul, in our mind, than the average company. So that’s why we’re overweight technology.

R: I’m a little surprised, given your holdings of – as I mentioned Apple, Microsoft, Intel, Cisco – not to see Alphabet among them.

JB: We came very close. I pull my hair out, because we literally were ten dollars away from buying it when it was below 700. So it’s something we’re watching, and we’d like to see a pull back. But yeah, it is a name that we don’t have yet.

R: As you look at that, when you have those regrets, trading stocks is a whole other thing. Picking stocks is one thing, trading them I find to be brutally difficult. I’m glad I’m out of that business right now. Do you re-evaluate as you see prices get away from you, or do you stick to your knitting?

JB: Both. We’re constantly looking at our numbers. During earnings season, of course, that’s the primary time where you’re adjusting your long term valuation targets up or down, but a smidge here or there based on what is disclosed during earnings. But we’re not going to chase something. We’re not going to say, well gee, we really like Alphabet, i.e. Google, and therefore it’s at 800 and something, and so we’ll get it just because we like it. We try to be disciplined. We want to stay focused on what has worked for us over the years, and buying things when [we believe] they’re on sale is what has worked. It is tough to find the bottom, and sometimes we miss the bottom, and we’ll lament Alphabet. But we’ve got a whole bunch of other names in the tech space, and we’re not unhappy with our tech holdings.

R: I frequently ask investors what their most frustrating stock is right now. Because usually that’s the one that they’re about to give up on, which means it’s just about to turn around. What’s your most frustrating name in your book right now?

JB: Boy, that’s a tough question.

R: I’m asking for true introspection. I need you on the couch to finish this one.

JB: We are broadly diversified in what we do. Obviously the things that haven’t worked out probably would be somewhat frustrating. This year Royal Caribbean, in the cruise line industry, is obviously one of our worst performing stocks of the year, even though we’ve done really well with it over the last three or four years. So that’s somewhat frustrating. People more concerned about short term issues; Zika, the election, those sorts of things. When it’s a great company trading at a multiple of 12 with a generous dividend yield.

R: So in 2012 it went from 20 to 80. The problem is it hit 100 in between. There’s 20 to 70 in change right now. Great stuff. John, it was really great to have you on. John Buckingham, Chief Investment Officer at Al Frank Asset Management, visiting from California into our New York studios. I’m staying in California at least for a few more days. Cory Johnson here on Bloomberg Markets, and this is Bloomberg.

The Case for Value Investing

We believe that you pre-pay for expectations in growth stocks, whereas value stocks have already been discounted. This is why over the long-term, growth stocks have trailed value stocks, returning an annualized average of 9.4% while value stocks have returned an annualized average of 13.6% over the same time period.

Download The Case for Value Investing

To listen to the audio, click the following link: http://www.bloomberg.com/news/audio/2016-10-18/bloomberg-markets-buckingham-on-seeing-stock-picker-s-market.

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John Buckingham is the Chief Investment Officer of Al Frank Asset Management, a division of AFAM Capital, Inc. AFAM is an Investment Adviser, registered with the SEC, is notice filed in Texas, California and various other states. AFAM is editor of The Prudent Speculator (TPS) newsletter, weekly commentaries and any attendant publications and is the investment advisor to individually managed client accounts and certain mutual funds. Registration of an investment adviser does not imply any certain level of skill or training.
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