They’re all long-term survivors and thrivings who have been hit hard this year. They have excellent balance sheets and are likely to overcome short-term difficulties to continue to gain market share and grow in the long term. You get above average growth at reasonable prices.
We first bought Apple many years ago. Our top base at Apple is 39 cents. Apple is down 20% this year. So, is Apple a bad stock or a good stock for us? This year is bad. All in all great.
Google and Meta are fantastic companies with tons of money, minimal debt to that money, and lots of stock buybacks.
A third theme is “Consumers are still hooked”. Please specify.
Retailers Target and Nordstrom, and toymaker Hasbro are all struggling in the short term, but will thrive in [due course].
Target over-ordered goods when they couldn’t get them due to saving container ships. Hard-hit Nordstrom is poised to rebound.
Hasbro has had issues related to collectors’ concerns about overprinting trading cards. It was a supply chain issue.
Your next theme is “The Fed pokes a hole in the punch bowl.” Please explain.
The Federal Reserve has raised interest rates in all bond markets, but this should benefit regional banks like Citizens Financial and Bank OZK. Major monetary centers, such as Bank of America and JPMorgan Chase, have diversified their financial flows and reach.
There is value to be had in banks, plus you get nice dividends that go up because the banks become more profitable.
However, while they have generally performed well against the wider market, they have seen a setback lately.
Theme number five is “Electric vehicles are accelerating. But fossil fuels do not go the way of the dinosaur.
Everyone is excited about electric vehicles. General Motors [for example] invests a lot of money in its internal combustion engine cars and uses it [profit] to fund his EV initiative. It advances its “electrification” plans from year to year.
Tesla has been a stock disaster this year. He’s not going to go bankrupt. But to buy Tesla, you pay a very high multiple. I would rather own GM.
Oil deserves a place in the portfolio, and two very good names are Civitas Resources and EOG Resources. We’ve seen oil stocks do extremely well this year, but I think there will be a supply problem; we don’t have incentives for companies to explore for oil because of government regulations.
So legacy companies that have already made investments are likely to be the beneficiaries when we have the inevitable oil price spikes. [during] geopolitical events of concern to the global supply chain.
The situation around oil will always be a headwind because oil pollutes the environment, even though electric vehicles may actually create more greenhouse gases because lithium must be extracted from the ground for vehicle batteries electricity, and this has an environmental cost.
Then you need to charge the batteries, which are usually powered by fossil fuels.
What do you think of investing in companies whose products go into the manufacture of batteries?
You will need more and more lithium to meet the demand for batteries. Albemarle is a company that produces lithium. It trades at less than 10 times earnings. So while it’s extraordinarily well made, it’s still reasonably priced.
We consider the electric vehicle as a “gold rush” in its infancy. Albemarle is a “pick-and-shovel business”, selling products to “gold panners” [as it were]. They won’t be the ones who find the gold, but they will get rich selling stuff to anyone looking for the gold.
The next theme is, “It’s a big world out there.” Are you talking about international?
Right. International markets have performed poorly this year in their own currencies; and because the dollar has been so strong, when you translate it into US dollars, they have been a disaster.
But Europe will eventually emerge from the other side of its recession. I want to invest in companies that will survive, like Deutsche Post; DHL [couriers] is a division. Deutsche Post is also a German mail carrier.
Sanofi is a French drug manufacturer. They’re a big drug name in Europe and have a good dividend, but they’ve fallen behind – and that’s why we love it.
Manpower Group, a recruitment services company, has a strong exposure to Europe. They have been in business for seven decades and are profitable. I think they will do just fine.
This is the time when you want to buy companies exposed to Europe.
The seventh theme is “Good things come in small (and medium) packages”. Why do you like some of these stocks?
Over the past decade, large caps have outperformed small caps, which have lagged, although historically small and mid caps have outperformed large caps over the long term.
We primarily invest using strategies that have performed well in the past and we believe they will continue to perform well.
I like the exposure to US based companies which are trading at very reasonable valuations.
Four companies have been hard hit this year.
Greenbrier Cos., a railcar maker, has seen its downturn before and is expected to rebound again in 2023 or 2024.
MDC Holdings is a home builder. The housing market has been hit very hard. But there is still a housing shortage in the United States. The MDC is very well capitalized. They have a dividend yield of over 6%, and this rate is increasing. Over the years, they’ve had 7% or 8% stock dividends.
Lumentum, an optics and photonics [lasers, optical fibers, for example] network equipment product provider, has been extremely hard hit by concerns over overall technology spending. But we believe substantial earnings should continue to grow. Although many company stocks were hit hard, their earnings were not. That’s the fascinating thing.
[The final stock included in this seventh theme is] EnerSys, which manufactures industrial batteries, such as fork batteries. Warehouse expansion had seen a big boom, but the economic downturn has [brought that] to a sudden stop. So that part of his business is in trouble.
The stock price reacted violently on the decline far more than it should based on what we believe is its long-term earnings target.
Overall, what do you expect for corporate earnings in 2023?
Earnings will remain healthy as nominal growth is expected to be strong even though real growth is negative.
Corporate profits are measured in nominal dollars. Generally, companies can pass on higher costs to their customers, so stocks have always been a very good hedge against inflation.
What is the thing that guides your investment?
There are all kinds of stories [statistics] who say that when the economic numbers are terrible, that’s when you want to buy stocks, not when you want to sell.
John Buckingham (Photo: Andrew Collins)