John Buckingham is the chief investment officer of Al Frank Asset Management. Buckingham was taught value investing by Al Frank and has worked for Al Frank Asset Managment for more than 25 years. He is known to use quantitative models to sift through 2,800 U.S. stocks with value metrics to find companies selling for a discount from intrinsic value. Buckingham did a recent interview with Barron's in which he discussed a number of issues. He shared his views of the market and some of his fund's holdings as well. Buckingham also talked about why Walt Disney ( NYSE:DIS ) and Gilead Sciences ( NASDAQ:GILD ) are appealing to value investors. He even discussed his fund's energy holdings which have been beaten down by the collapse in oil prices .
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Interview with Barron's :
Barron's : Let's start with the market. What's your view?
Buckingham: A segment of the market is focused on "get rich quick" plays, pushing up the Netflix es ( NASDAQ:NFLX ) of the world. Meanwhile, the majority of investors are freaked out, trying to guard against downside risk, as evidenced by Treasury yields falling even though the Fed is supposed to raise rates. The fact that most investors are not buying stocks en masse indicates a tremendous amount of fear out there.
Barron's : That's exactly what value managers want to see, right?
Buckingham: It's a great time to be a value investor. The difference between the Russell value and growth index returns is tremendous right now - more than nine percentage points. You have to go back to 1998 and 1999 to see that type of discrepancy. We go through these periods where valuations don't matter, but we have seen repeatedly that ultimately stock prices reflect the underlying value of corporations. That said, we are holding a bit more cash in our accounts - about 5% to 8% - compared with our more normal 2%.
Barron's : Why?
Buckingham: Over the short term, I am concerned about the lemmings. There is so much money that can jump around via algorithmic trading strategies, which are forced to sell stocks as volatility increases. It contributed to the flash crash last month, when the market fell 1,100 points. We are in for turbulence and volatility, given the overreaction we have seen to various news items, whether from the Federal Reserve or China. September and October have also historically been the weakest parts of the year.
Barron's : What do you expect to see next from the Fed?
Buckingham: Frankly, I would like to see the Fed raise rates and get it over with so investors can stop fretting. Stocks usually do fine surrounding a rate increase. Secondly, the only reason the Fed will raise rates is because the economy is doing better, which is generally supportive for corporate profits.
Barron's : How does the slowdown in China affect profits?
Buckingham: Fear about China has been discounted in commodities, which have already gotten crushed and discount far worse growth than what we have seen. The outlook for corporate profits generally has not been as strong as a couple months ago, mainly because second-quarter earnings and guidance from energy, materials and industrial firms were worse than analysts had modeled. China growing at 6.9% instead of 7% doesn't have an overwhelming impact on the bottom line of most U.S. corporations, but it is an issue at the margin. That said, stocks have already discounted a less-than-stellar outlook, with expectations baking in a modest contraction in Standard & Poor's 500 earnings this year.
Barron's : Your outlook is rosier?
Buckingham: It might be disconcerting with the Fed singling out global economic growth as a reason it didn't raise rates. But everything stated is what we have been hearing all along. Plus, if the U.S. real economy is growing at 2% and you have 2% inflation, that's 4% nominal growth. Companies are also becoming more efficient, refinancing debt and buying back stock so corporate profit growth should be greater than economic growth over time. I don't see anything on the horizon that suggests a sustained profit recession, which is what you need to sustain a bear market.
Barron's : What about valuations?
Buckingham: Many people will say the Shiller price/earnings ratio is at the high end of its historical average, but you can't look at investments in a vacuum. In 2000 and 2007, during prior market peaks, which you could argue we are near despite the pullback, you could get 500 basis points [five percentage points] in a "risk-free" investment like money markets. Today, you get one basis point. The dividend yield on the market is higher than the 10-year Treasury yield, and companies outside of the energy and materials sectors have very healthy balance sheets and low borrowing costs. Clearly, I would rather the market trade at 12 times earnings rather than 17 times, but when yields in competing investments are minuscule, equities are attractive.
Read the rest of the interview here: http://www.barrons.com/articles/john-buckingham-the-education-of-a-value-investor-1443248102
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