MoneyLife Radio March 10, 2016


March 11, 2016

John Buckingham appeared on MoneyLife radio on March 10, 2016. At the time, John said he looks for undervalued and out of favor companies who have low P/E ratios, low price to book value, low price to sales ratios. He also likes dividends and gives a premium to companies who reward with a regular income stream. He differs in his affection for technology, with portfolios of 20% technology as of March 2016. Microsoft, Intel, Cisco and Oracle are some examples. It is a normal market occurrence where value goes through underperformance and outperformance. For example, Value proved it’s value from 2000-2003, but value has historically outperformed growth. Right now John thinks that “growth” companies are overvalued.

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MoneyLife Radio with John Buckingham on March 10, 2016

Introducer: It’s hard to know what to do next in the stock market.

TV/Movie Character: Where am I? What am I doing here?

Introducer: That’s because one expert’s rally is another’s prelude to a correction.

TV/Movie Character: Most people do go both ways.

Introducer: One manager’s buy is another man’s sell.

TV/Movie Character: Have you come to any conclusions yet?

Introducer: Each day the Money Life Market Call brings you a different expert’s take on where to invest, and what to avoid.

TV/Movie Character: Now listen gravehead, I’ll explain it so even you can understand it.

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Introducer: It’s the Money Life Market Call, now.

TV/Movie Character: The only reason we’re here is to make catty observations, and rude remarks. And there was nothing good on TV.

Chuck Jaffe: It’s Money Life Market Call time, and you’re in for a treat because my guest is John Buckingham. He’s the Chief Investment Officer at Al Frank Asset Management, one of my favorite folks to talk stocks with. Now he’s also the Editor of The Prudent Speculator Newsletter. Now just yesterday on this show we were talking with Mark Hulbert. Well here’s all you really need to know about The Prudent Speculator, it’s the number one newsletter on Hulbert. And now with Hulbert Financial Digest just going away, as we discussed yesterday, it’s basically forever the number one newsletter. Now if you want to learn more about the newsletter they are on Twitter @tpsnewsletter. It’s theprudentspeculator.com. But if you want to learn more about Al Frank Asset Management, and the Al Frank Value Fund, afamcapital.com. John Buckingham, it has been a while. Welcome back to Money Life.

John Buckingham: Yeah. Thanks for having me again.

Chuck Jaffe: We always start with methodology, because people need to understand what goes into it before they say, okay, that’s a buy, or that’s what makes a sell. For you value is the name of the game. But explain how value works for you, because value means different things to different people.

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


John Buckingham: Well it sure does. And we look for undervalued, and out of favor companies… stocks that are trading for low price earnings ratios, low price to book value, low price to sales ratios relative to their peers, as well as relative to the market. Plus we also like dividends, and so we tend to give a premium to companies that reward us with a regular income stream. So value for us is, is traditional in the sense that we’re buying things that are on sale, buying bargains. Where we differ a little bit from some other value managers is our affection for technology. Our portfolios are about 20 percent technology, which many value investors are less than ten percent. And so we do find opportunity and value in tech. And yes, you may have higher price to sales ratios, and maybe higher price to book value ratios. But here it is interesting that in the last, oh, four, five years, some of the hottest tech stocks from the turn of the millennium have become value investments. You know boring smokestack type companies, like Microsoft, and Intel, and CISCO, and Oracle. So there are a lot of, there is a lot of value in technology in our mind, and that is where we differ from many of our peers.

Chuck Jaffe: In terms of value and the market, of late, value…Of late. Actually now for a couple of years value has really been struggling to keep up. In your mind is that a normal part of the cycle, and we expect to see a pickup, or is it something else that’s going on? Is there a change that has made it harder for value, or normal market cycle?

John Buckingham: Well I think it’s a normal market occurrence. Value goes through periods of outperformance and underperformance. No two market environments are ever alike of course. But if you go back to, again, the turn of the millennium when the tech bubble burst, you know value is out of favor in 1998, and 1999, and then it proved its value, no pun intended, in 2000, ’01, ‘02, ‘03. And I see this market kind of like that in terms of, we have, we have had ridiculous valuations in private sector technology companies. The Ubers of the world, the Snapchats, and all those sort of things. And yes, many of those companies are legitimate, and, and will ultimately go public, and prove to you know reward their backers. But valuations were extremely stretched, and I don’t want to call it another tech bubble, but it was pretty close.
And I know that some of that has actually you know burst here with many companies, private equity investors having to write down the value of their private equity investments. So I think that it is just a cyclical period, and investors, will ultimately, as they have every other time, will start to come to their senses, and will reward companies that are inexpensively priced. And that’s been the experience of, of the market for you know 80, 90 years. Value has historically outperformed growth by something on the average of four percentage points per annum. And obviously that compounds to a substantial, substantially larger sum of money over time.

Chuck Jaffe: Okay. So that gives us an idea of how it works. Given what you see right now one of the things that I always like chatting with you is, about is sort of how over or undervalued you see the market at any given point in time. We’ve been through an interesting little stretch here. We had the worst opening to a year ever. We had some more market volatility, and, and not happy news. And then we got a little bit of a pick up. So where on the valuation scale do you see things right now? Is this a market that’s viable, or is this a market that is still perhaps a little overvalued?

John Buckingham: Well it’s always a market of stocks, and not simply a stock market. So there are areas of the market that are overvalued. Some of the growth-ier type companies are overvalued, in my opinion. Whereas many of the value type companies are, are very undervalued. When you look at the market though you can’t just look at one, one metric. Let’s say you know if you want to look at the S&P 500, well clearly the PE ratio on the S&P 500 is at, more at the higher end of its historical range than the lower end of its range. So by that criteria you would be saying the market as a whole is somewhat overvalued. But when you think about where we are on the interest rate front with interest rates at historically low levels, in my opinion that can support a higher valuation for equities.
Again, the returns you’re getting on stocks today, whether it’s a dividend yield, and the dividend yield on my portfolio is three percent. Compared to a less than two percent yield on a ten year treasury I think that’s extremely attractive. Or whether you look at, say an earnings yield, the inverse of the P/E ratio, you’re talking about something on the order of six percent, you know versus a two percent or so on the ten year treasury. So I think equities are very attractive relative to the income generated off of competing investments. And so in that regard I think the overall market, if I had to say is it over or undervalued I’d say the overall market is actually undervalued, given the interest rate environment.

Chuck Jaffe: Okay. And what names, a name or two, stand out to you? And maybe we should make sure that at least one of those names comes from the tech area.

John Buckingham: Well, being a sucker for inexpensive valuations, and dividends. Seagate Technology, the disk drive maker, STX is the ticker symbol, is very attractive in our mind. Dividend yield is over seven percent. They actually just raised the dividend last year. Valuation wise it’s trading around ten times trailing earnings. And yes, earnings are going to be lower this year, which of course most investors don’t like to see earnings trending south. But the stock has already fallen dramatically, so much so that we think it more than discounts any near term downturn in the, in the underlying business.
And historically the disk drive business had been very, very cyclical, because there had been a lot of competitors. Now there’s really only two major players: Seagate and Western Digital. And while they still will have cycles, their earnings are not going to less than zero, i.e. losses, as they did in maybe the 90s when the cycle turned. Now you’re talking about earnings of two, three dollars a share for a trough environment. And yet the stocks trading, well it has bounced back some, but it’s still in the 30s, $30 range. So seven percent yield, good balance sheet, and a very reasonable valuation. And data storage in my mind is a growth area over the long hall.

Chuck Jaffe: So that’s Seagate Technologies, STX. What’s something else that stands out to you?

John Buckingham: Well the the financial sector has gotten battered and bruised this year, so being a value investor, and liking to buy things that are on sale companies that have been hit hard. So far would be something like in the insurance area, Prudential Financial, PRU, and financial services, where you have a P/E ratio there of seven, and a dividend yield of four percent. And this is what’s, you know, lost I think on many…Many investors who only focus on ETFs, or indexes, is that you know, wow the S&P’s at you know 16 times earnings. But components of the indexes are, and some major corporations, like Prudential, are trading at, at very reasonable price tags. And again they’re, they’re discounting, and reflecting concerns about interest rates going lower, and concerns about “negative interest rates”, which we don’t think will happen. But we think that’s been more than discounted. And again, you want to buy these things when they’re on sale. And you have companies that are still likely to make you know a substantial sum of money. Earning expectations for Prudential over the next few years are in the ten dollar share range, and the stocks trading, you know, south of 70.

Chuck Jaffe: We haven’t talked about sell discipline. But obviously if you like value, as value starts to morph, and you see things change, that would be when you get out of it. What’s something you’ve had to move away from recently, and why?

John Buckingham: Well we took some money off the table on one of our, our biggest winners because it had done really well this year, and it had done really well over the last few years. And that company is Tyson Foods, the protein producer, TSN. And Tyson had had, had, is up 24 percent this year. And we just took some money off the table, and it didn’t sell at all, but sold half of our position was we thought it was prudent to produce some exposure to a stock that had performed really well. We still like the company, still think there’s upside potential, but we wanted to free up that capital to be able to buy something that was, that was more undervalued.
So that’s, so the whole point of, of value investing, and being disciplined is that you know, usually when, and the time to buy these companies is when, you know conditions don’t look so good. And Tyson is firing on all cylinders, they had great, you know, quarterly earnings. Business seems to be doing really well. They’ve made some acquisitions that are really paying off. And growth potential is, it is, is nice, but valuation wise it’s gotten to be, you know somewhat expensive. And so our job is to you know be disciplined, and take some money off, and plow that money back into something that’s more undervalued.

Chuck Jaffe: Well now we have an understanding of how it works. We’re gonna take time to see how you feel about some stocks that my audience is particularly interested in…

[music playing]

Or fold it. Yes, it’s hold-it or fold-it time with my guest John Buckingham, the Chief Investment Officer at Al Frank Asset Management, the Editor of The Prudent Speculator Newsletter. On Twitter @tpsnewsletter for The Prudent Speculator, theprudentspeculator.com, and afamcapital.com to learn more about the firm, and the Al Frank Fund, which is VALUX, and more. You know how hold it or fold it works, so we’re just gonna jump straight into it starting with a request from Quirky in Hammond, Indiana for amazon.com, AMZN.

John Buckingham: Well as a value investor you wouldn’t think we’d have much interest in Amazon, and that is correct at the current price. But the fact that the stock is down 18 percent or so on the year makes it a little more appealing. The problem of course is valuation-wise Amazon is still very expensive, and therefore we would be rating it a sell. But if it were to drop say another 25 percent or so from here, with no changes really in the business outlook, we might think about a purchase. And note that I said we might think. We, we certainly wouldn’t be buying it yet. So if you own it I’d be a seller.

Chuck Jaffe: So that’s a sell on amazon.com, AMZN. And yeah, that’s where I would have expected it to be given how popular it was. But now I want to talk about a stock that’s been extremely popular when we have guests on the show talking about it. Casey in Berryville, Virginia wants to know about Gilead Sciences, GILD.

John Buckingham: Well it is somewhat interesting that a value investor would find value in biotechnology, because generally those stocks are very expensive, and don’t have much in the way of income, and a lot of it is you’re betting on you know FDA approvals that may or may not come. But Gilead actually makes a ton of money. Right now the stock’s trading at seven times earnings, and giving us a two percent dividend yield, so Gilead is actually one of our favored names. And I know it’s under pressure now because of concerns about drug pricing, and the political climate that we’re in. But I, you know I’ve been around for quite a while, and believe it or not, I was around for the first Clinton administration, and Hillary Clinton back then tried to get through drug pricing, and couldn’t. There was tremendous value to be had in, in pharmaceutical companies at that time, and tremendous profits to be made over the next few years. So I think Gilead is a name you definitely want to be buying here.

Chuck Jaffe: A buy on Gilead Sciences, GILD. Now you talked a little bit about financial services, but you didn’t talk about bank stocks. I’m going to throw two at you; Bank of America for Sri Ram in Cupertino, California, that’s BAC, and Wells Fargo & Company for Dave in Beaver Dams, New York, that’s WFC.

John Buckingham: We like both of those names. Bank of America, believe it or not, we just recommended in our latest edition of The Prudent Speculator for the first time, and just added it to my own portfolio, Buckingham portfolio. And the reason we like a Bank of America and Wells Fargo, especially today, is that the stocks have, again, been hit hard on concern about trouble in the energy sector, and how that might impact their non-performing assets, as well as the interest rate concerns, and the impact it might have on their net interest margin. But we think that the stock prices more than discount any bad news that might come.
And frankly, the companies have been very forthright in talking about their exposure to the oil patch. Wells Fargo, you’re talking about less than two percent of loans, and same thing for, for Bank of America. What I think people forget is that you have a part of the economy that is doing poorly, which is the energy sector, but we’re also putting you know a few more bucks into everybody’s pocket every month on the consumer side, and so credit quality is actually pretty good on the overall basis. So I think that the market has gotten too pessimistic on the banking sector. So both Bank of America and Wells Fargo would be buys in my book.

Chuck Jaffe: That’s a buy on Bank of America, BAC, and Wells Fargo & Company, WFC. But James in Burlington, Vermont wants to know about National Oilwell Varco, that’s NOV.

John Buckingham: Well again, illustrating my gray hair, back in 1989, ‘90 we went through the savings and loan crisis. And the companies that were able to withstand the downturn, and to make acquisitions, and have the capacity to weather the storm ended up emerging as big winners when the cycle turned. And I think the same thing is going to happen in the energy space. And at a company like National Oilwell Varco, which has a, a very solid balance sheet, and an excellent credit rating, and right now they’re paying a six percent dividend yield, which of course we are not you know wedded to in this particular instance. If they could take that capital that is dedicated to the dividend, and make a nice acquisition of something on the cheap we’d much rather they do that, but for now they’re paying a six percent yield. I think National Oilwell’s a survivor and a thriver in the long-term, so I would definitely be looking to buy it if you’re able to stomach the volatility of the energy space right now.

Chuck Jaffe: So it qualified by on NOV, National Oilwell Varco. We have to say our goodbyes to John Buckingham, but John it’s always a pleasure. Thanks so much for joining me on the show.

John Buckingham: Thank you for having me.

Chuck Jaffe: John is Chief Investment Officer for Al Frank Asset Management. They run the Al Frank Fund, VALUX. Afamcapital.com. He is the Editor of The Prudent Speculator. Theprudentspeculator.com, @tpsnewsletter on Twitter. Hey, we’re just about done with today’s show, but I’ll tell you what’s coming next week, and wrap things up when Money Life continues right after this message.

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


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