Golden Rainbow: 5-Star Buy for Defensive Value
04/11/2016 10:00 am EST
Barry James, portfolio manager for The James Advantage Funds talk with us about his fund family and its focus on generating growth & income, even in a declining market. He also highlights a trio of conservative stock ideas.
Steven Halpern: I’m very excited today to be introducing Barry James, CIO and portfolio manager of the James Advantage Funds. How are you doing today, Barry?
Barry James: I’m doing very well, thank you.
Steven Halpern: First off, could you share a little background about the James family of fund?
Barry James: Well, sure. Well, the James family is a correct nomenclature. We started back in the 1970s; 1972 my father started the firm, and he’s the first guy in his doctoral dissertation to disprove the random lock.
He really was one of the progenitors of the whole concept of relative strength and that disproved it, and we kind of started in that phase.
We were working for a bank in the 1980s, and they wanted a mutual fund and that’s how the Golden Rainbow came about and that was their symbol of the bank -- it was a golden rainbow -- so that’s how it got its name.
But it’s a fund that’s designed to have some growth and income, but also preservation, and we tactically manage it in the sense that we will adjust equity levels up or down based on risk, and we will adjust the durations on the bonds based on risk as well.
A couple of moving parts in there, but, by and large, a fairly conservative fund that is kind of designed to be how you’d put it -- a core holding for folks.
Steven Halpern: Now I understand it’s also a five-star rated fund. Do you all attest your conservative approach to that high long-term high rating?
Barry James: Well we’re very thankful for that. We don’t go out for the rating itself. We’d rather do really well for our clients and, hopefully, those ratings will follow along.
But we have had a pretty good success over the couple of decades that the fund has been around, and haven’t had too many down years with the fund and the worst was 2008, and it was down about 5.5% in 2008 and you can come back from a smaller decline like that. It’s when you get the really big declines it takes a long time to crawl out of that hole.
Steven Halpern: Now, as you mentioned, the funds embrace the focus on growth and income, but also emphasizing preservation of capital. Could you discuss your current market outlook and whether or not this is a particularly good time for investors to consider the James Balanced Golden Rainbow?
Barry James: That’s a great question. As we look at the markets today, what we see is we’re in a transition period from the time of quantitative easing which had supported the market and really helped prices to rise, to a period where there isn’t additional quantitative easing and so the market goes back to its fundamentals.
I feel that it has to stand on its own two feet -- which are earnings and valuation -- and the earnings haven’t been very good lately, and valuations are a bit extended so from that perspective what we see is likely to be a continuation of a turbulent market in 2016 and usually in the lame duck year of a president, the stock market doesn’t have really very good returns as well because there’s confusion there.
What we’re likely to see is the continuation of the volatility we had in the first quarter.
That being said, this fund made money in the first quarter, and the bonds were very helpful, and we had about half bonds and half stocks and as we looked at it, midway through the quarter it looked like risks had been worked out of the market to some extent.
We measure that each and every weekend. We don’t try to really guess which way the market’s going, we just look at risk levels so we said risk levels were pretty low for the stocks then.
We actually did some buying in mid-February and that worked out better than we could have anticipated in March, and we’re very thankful for, but we had bonds at the beginning of the year as well and that offset some of the risk.
That’s how we try to balance it. We’re not doing anything wild. We’re not into futures or options. It’s strictly stocks, bonds and cash, and making gradual adjustments between those as we see the risk situation shifting.
Steven Halpern: To better highlight your investment approach, let’s talk about some specific stocks that you find attractive, and one of those is Kroger (KR). Could you share your thoughts on that?
Barry James: Well, sure, when we look at a stock there’s three things that we look for. We’re looking for reasonably good valuations. We’re looking for solid historical earnings.
We do not look at what projections are because they’re not very helpful in terms of projecting future prices regardless of how good the analyst is. It doesn’t really help you in that regard.
And then, lastly, we look at that concept called relative strength, which is simply looking at the price movement over the last year compared to the market, and Kroger scores favorably in each of those categories.
The other thing that we’ve been looking at lately in this volatile market are companies that are buying back shares and paying a dividend, and Kroger has all of those. In the environment that we’re in right now, the lower interest rates helps them expand.
They recently bought Harris Teeter. They’re experimenting with grocery pick up where you place the order ahead of time and you just show up and they deliver the groceries to your car, and they’re really been on a good count of buying back shares, so that’s something that we like to see.
We know that there’s some competition from Amazon and the like, but we think that they’ll be able to maintain the profit margins they’ve had and continue to move forward and it’s a good defensive hold when you have a volatile market like we do now.
Steven Halpern: Another stock you point to is Avery Dennison (AVY), which is a name that many listeners may not be familiar with. What does this company do and what’s the attraction for you?
Barry James: Well, they’re primarily labels, very sexy business there, but they help with retail branding and information and supply chain, and they also do a lot of wearable sensors in the medical technology area.
These applications are pressure sensitive materials and the like have really helped them, and they’ve been at the front and center in terms of research and development and new technologies in that area, and they have the same characteristics in many ways that Kroger does that they‘re not too expensive.
They have really strong earnings, and they’ve really been outperforming the market, and we’ve had the dollar pull back a bit this year and they do a lot of sales overseas. If that were to continue that would be helpful for Avery Dennison as well.
Steven Halpern: Now finally you highlight a leading firm in the refining sector, Valero (VLO). What do you like in this situation?
Barry James: Well again it is selling very cheap, only about seven times earnings and earnings have been really, really going very well, because when you think about it the cost of goods that they have are the crude oil prices because they’re a refiner, and with those down that’s very helpful.
Now they’ve popped up a bit lately and so the stock has pulled back so that is another thing that makes it a little more attractive to us is that you have this pullback. Any time they’re less than $100 a barrel they’re making very, very good money, and the other thing about low gas prices that we’ve had people are now driving more.
We had a record amount of miles driven in 2015, and consumers are now buying those piggy cars once again like Ford Expeditions which get very low mileage. Hopefully that’ll be good for their sales side as well that they’ll have lots of product.
Steven Halpern: Again, our guest is Barry James of the top-rated James Balanced Golden Rainbow Fund. Thank you so much for your time today.
By Barry James, Portfolio Manager for The James Advantage Funds