John Buckingham of The Prudent Speculator likes undervalued large caps with dividend yields better than the ten-year Treasury. Meanwhile, in today's interview he says investors should steer away from the still-battered housing sector.
Kate Stalter: Today we are speaking with John Buckingham, who is the chief investment officer at Al Frank Asset Management. Thank you very much, John, for joining us today.
John Buckingham: Thanks for having me on.
Kate Stalter: I usually start out these interviews by asking for your take on the current market conditions, and obviously things have not been very good. But give us some context from the analysis that you have been doing, and tell us what you are thinking about that, and what we can expect.
John Buckingham: Volatility is always scary, especially since we are not that far removed from the 2008 and 2009 downturn. So it is not unusual to see people having some elevated fear levels, which is what we are seeing right now.
Obviously we have the situation in Washington, where we did finally get a debt-ceiling deal, but nobody seemed to be very happy about it, so that is weighing on investors. And, of course, we have had some disappointing news on the economy.
The interesting thing about the ISM numbers that were out this week is that they are still showing an expanding economy, not a contracting one, and yet we would like the numbers to be better..but we are still seeing expansions. So what we try to do in our shop is really focus on the companies in which we are invested, and corporate America is doing very well, thank you, in terms of their earnings.
Second-quarter earnings have come in very, very favorably, at least on the year-over-year comparison, even though the economy has not been doing all that well in the first and second quarter of 2011.
So corporate profits have been strong. We think we are going to continue to see earnings growth over the next 12 months, and frankly we think that the investors should be taking advantage of any kind of a market downturn here to pick up stocks.
We may talk a little bit later about some of the reasons for my optimism, but right now we have a situation where interest rates are extremely low and the dividend yields are now, at least on the stocks that we buy, almost as high as what you are going to get on a ten-year Treasury. We think that is very attractive competition, if you will, between the two, and we definitely see favoring stocks at this point.
Kate Stalter: Well let me follow up on your comment about why you have some optimism at this point. I wanted to ask you about some of these industries or sectors or individual names that you do see as showing strength right now.
John Buckingham: We are very much a fundamentally driven shop, trying to buy undervalued and out-of-favor stocks. Companies trading at inexpensive valuation, relative to where we think they deserve to trade over the long term.
So when stocks fall in price—and we really have not seen a big decline in earnings, in fact earnings continue to grow—that tends to make us more optimistic. We are equal-opportunity stock pickers.
We don’t make big sector bets, although these days, we are kind of partial to some of the things that have been beaten up pretty badly here in the last couple of weeks, and that is technology, energy, and materials. Those would be some of the sectors that we would find attractive at this point.
Kate Stalter: What are the areas you believe individual investors should be avoiding right now?
John Buckingham: Well we are not suggesting that any particular sector be avoided in its entirety, although we are underweight to financials.
We do have concerns about the European sovereign debt issue and how that is going to play out and affect many of the multinational banks and companies involved there, and frankly we also have some concern about continued fallout of the housing debacle and what kind of toxic assets may remain on the balance sheets of many of the banks.
So we are trying to stick to what we would call the higher-quality names in the financial space. We do like some insurance companies as well.
As you know a big bank, like a JPMorgan Chase (JPM), and then we are also partial to Goldman Sachs (GS) in the brokerage area. So we do have some investments in financials, but it is an area where, relative to our Russell 3000 benchmark, we are underweight.
NEXT: John’s Picks
|pagebreak|Kate Stalter: Any other investment vehicles, whether they are funds or stocks, that you are putting your clients into these days?
John Buckingham: Well, we are pretty much a vanilla manager, at least on the equity side.
We have stocks and cash, so there aren’t any additional vehicles that we would deploy on this side of our business, although we do have a tactical ETF strategy on the other side of our business, and that is invested in fixed income and sector and International ETFs. But for what I do, it is strictly equities, so I am definitely focused on that area.
I do believe in the long-term health of the US economy, although I know it is kind of hard to convince people of that right now. But the economy—despite all of the things that have happened to it over the years—continues to grow over time, and I think we will survive the debt crisis and we will muddle along, as is said, and ultimately will see growth pick up and resume as it has happened time and again.
Kate Stalter: So John, tell us about some of the individual stocks that you think investors might take a look at when they are doing their research?
John Buckingham: Well, sure. In this market environment where we have extremely low interest rates, I actually have a listing of stocks that all yield above what the ten-year Treasury is currently yielding. I think that is a very attractive type of investment to get into.
The stocks that we like are undervalued in their own right, but then again also generating dividend income above what you might get on a Treasury.
So, I will kind of just rattle off some names:
- Lockheed Martin (LMT) in the defense area, which has obviously been hit hard by the concerns about reduced defense spending going forward, yields 4% and trades for ten times earnings.
- Waste Management (WM) in the trash-hauling biz yields over 4%, 4.3%.
- Whirlpool (WHR), an appliance maker, yielding 2.9%, trading at seven and a half times earnings.
- Freeport McMoRan Copper & Gold (FCX), which is the big copper and gold producer, yielding, with special dividends, 3.6%.
- Abbott Labs (ABT), also hit hard on some concerns about healthcare spending going forward, yields 3.7%.
- Intel (INTC), which yields 3.8%, in the technology area.
So, I think there is opportunity in a variety of companies, but when I can get a diversified portfolio of undervalued stocks yielding above what the ten-year Treasury is paying me, I think that is very attractive.
