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Investors Bearish...Time to Buy!
05/20/2013 9:00 am EST
Despite the market's tremendous run, investor sentiment remains bearish—a great time to find value—says John Buckingham of The Prudent Speculator.
Nancy Zambell: My guest today is John Buckingham, the chief investment officer of Al Frank Asset Management, as well as the editor of The Prudent Speculator newsletter. Thanks for joining me. I appreciate your time.
John Buckingham: Thanks for having me.
Nancy Zambell: John, this equity rally is kind of crazy, isn't it? The market is regularly over 15,000. How much longer can it last?
John Buckingham: It's fascinating what we've seen in terms of investor sentiment. You would think that people would be a little more optimistic or enthusiastic about equities, but yet money is continuing to be shoveled into bond funds. So despite the rally we've seen in equities, there's just not a lot of enthusiasm for stocks.
Some of the sentiment gauges that we follow have actually been bearish, starting to become a little more bullish—such as the American Association of Individual Investors. Their sentiment survey, three or four weeks ago, actually registered the highest number of bears and lowest number of bulls I have seen since March 2009, believe it or not.
We are at almost record levels of pessimism, and that's a good thing if you're a contrarian investor, as I am. We don't want to see a lot of optimism out there, so the market can climb a wall of worry.
I do think that stocks can continue higher. I don't think stocks are too expensive, given where we are in the interest rate spectrum. Interest rates are still at historic lows.
Heck, Apple (AAPL)—a name I like on the equity side—issued debt at a 2.4% interest rate, and yet the stock is yielding 2.8% or 2.9% at the time. You could actually invest in Apple and get a higher yield on the equity side than you could on the debt side, which to me seems absolutely crazy.
But it's a sign of the times. Investors are still very nervous and very scared and very much distrusting of the rally we've seen. Frankly, I think that's a very good thing if you are a contrarian investor, as I am.
Nancy Zambell: Sure, it is a good indicator. Now, where are you finding value today? Some sectors have definitely gone a lot higher than others, but I think it's kind of becoming a stock picker's market.
John Buckingham: Well, it's always a stock picker's market, in my view. What we've seen here this year is that some of the areas that did very well last year—consumer staples, utilities, and health care—were generally characterized by having companies with big yields. Investors are infatuated with dividends nowadays-and high dividends, at that.
Those sectors have actually kind of petered out and pulled back. Whereas some of the more undervalued and more cyclical areas, such as commodities, energy, industrials, and materials, have shown some signs of life here of late.
We go where the opportunities reside. In our Prudent Speculator newsletter, we're always about trying to sell fairly valued stocks and then plow the money back into undervalued stocks.
There's probably no more undervalued area in our view of the market these days than in the gold miners. We've just recently added Barrick Gold (ABX) to our portfolios. Barrick has dropped over 40% this year alone—even though you're talking about the Dow at 15,000 and the equity market going crazy.
There's always opportunity out there for stock pickers and those who look at individual names...because it's not a stock market, it's a market of stocks.
Nancy Zambell: Right, and I think you recommended Newmont Mining (NEM) a while back, too. Are you still interested in that one?
John Buckingham: Yes, we've been early—as fate would have it—in terms of our entry into the gold mining area, but Newmont is a name we like.
Barrick and Newmont would be the top choices, in that they offer generous dividend yields and inexpensive valuations. And we do not think the market is properly valuing the assets that these companies are able to mine, and will be able to mine down the road.
The fascinating thing in the gold area is that the price of gold has come down this year, but nowhere near to the degree with which the stocks have declined. And even when gold was rallying in the last couple of years, the gold mining stocks were not participating on the upside.
I really think that they've overreacted on the downside. Costs of digging gold out of the ground and producing are still well below where we are in terms of what you're going to realize when you sell the gold.
I realize that profit margins can get squeezed very quickly as the price of gold comes down. But investors have discounted something far worse from an earnings perspective than I think what is actually going to materialize. Even if the price of gold doesn't rebound and sort of stays in the current range, I think these stocks will end up rewarding patient investors over the long haul.
It's always part of a diversified portfolio in everything we do. We're never making big bets on any one particular stock or sector.
You mentioned Newmont, and Newmont's been a dog for us this year. Yet our portfolios are up in high teens in terms of performance. So we're pretty happy with our overall returns, even though we may have a stock or two that hasn't rewarded us yet.
Nancy Zambell: Well, who doesn't? They're never always 100%. You just hope that you do a lot better in all your good ones than you do in your bad ones, and you certainly have a track record that is very stellar. Are you involved in any technology right now?
John Buckingham: We do like the technology sector. In fact, it's the sector where we have the greatest weighting. Our portfolios are something on the order of 20% or so in tech.
We still see lots of value. A lot of that value's in the larger cap technology names. Apple, of course, being one name that we like. The stock has rallied somewhat, after hitting those lows of a couple weeks ago when it was in the $400 range.
But they're still trading at a very inexpensive multiple, with a dividend yield that had been close to 3%—a little lower than that now—in a company that has a fantastic balance sheet loaded with cash. They're now using that to increase the dividend and just amped the stock buyback program significantly.
Intel (INTC), Microsoft (MSFT), Cisco (CSCO)...these are all stocks we think are inexpensive, trading at below market multiples in terms of earnings, and with above-market dividend yields and superb balance sheets with lots of cash.
I do think there's opportunity in technology, and that investors should not give up on the giant-cap or the mega-cap technology names, as there's opportunity for capital appreciation and significant income.
Nancy Zambell: I know you usually carry some financials and some health-care companies too. Are you very involved with either of those sectors today?
John Buckingham: We have been underweight financials for quite a while, but we've started to get a little more comfortable with them as the economy has shown some signs of life, as the credit difficulties have started to get behind some of these companies, and as dividend yields have started to increase.
We've recently just recommended HSBC (HBC), the global banking giant. We also have recommended a credit card issuer, Capital One Financial (COF). We've added a little more exposure on the financial side of the equation.
We continue to like names like Wells Fargo (WFC), Ameriprise Financial (AMP), and JPMorgan Chase (JPM). These are stocks we've had in our portfolio for quite a while. They've served us nicely, but we still think there's substantial upside in those names.
As far as health care goes, we actually don't have a lot of exposure these days. We actually had taken some money off the table on one of our big winners, a health-care company called AbbVie (ABBV), which was a spinoff of Abbott Labs (ABT) at the beginning of this year. It had performed really well, and we cashed in our chips and actually redeployed that money into other more undervalued sectors.
We still do have a little bit of health-care exposure. In the medical device area, Baxter International (BAX). In pharmaceuticals, Merck (MRK). We also not too long ago got interested in the drug distribution area, in Cardinal Health (CAH).