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All Contents © 2019The Kiplinger Washington Editors
By John Waggoner, Senior Associate Editor
| January 30, 2019From Kiplinger’s Personal Finance
Benjamin Graham, author of The Intelligent Investor, the value-investing bible, likened the stock market to a man with wild mood swings. One day Mr. Market would offer to sell you his business at a ridiculously high price; the next day he’d offer it at a crazy discount.
During market declines, mutual fund managers are paid to look out for fire-sale stocks. Many used the downturn that began last September to snap up new holdings or add to positions they already owned.
We asked a few smart bargain hunters to share where they’re finding good values now.
Prices and other data in this story, unless otherwise noted, are through Jan. 11, 2019.
Manager: Charles Bobrinskoy
Fund: Ariel Focus (AFOYX)
Cheap stocks are the “silver lining” in a bleak market, says Bobrinskoy, especially because investors’ worries about the economy now appear overblown. “We’re seeing data saying that not only was the jobs situation not bad, it was great,” he says.
One favorite that Bobrinskoy is buying more of: BorgWarner (BWA, $39.20), a leading manufacturer of powertrains and turbochargers for the automotive industry. The company is best known for products that improve fuel efficiency and lower carbon emissions. But the firm is also a leader in electric-vehicle powertrains and, in fact, it “makes more money from electric vehicles than gas-powered ones,” Bobrinskoy says.
Bobrinskoy also favors alternative-asset managers, particularly Blackstone Group (BX, $31.97), a member of the Kiplinger Dividend 15. Blackstone, which has $457 billion in assets under management, offers investments in real estate, private equity, hedge funds and bonds. Its quarterly dividend payout is variable, depending on what the company earns. But traditional dividend investors shouldn’t be put off by the company’s variable payout, says Bobrinskoy, as management takes great pride in Blackstone’s typically generous payout to investors.
The mutual fund industry is under pressure from low-cost and (from the industry’s point of view) low-profit index funds. That’s not the case with firms specializing in alternatives. “Alt managers are gaining assets,” Bobrinskoy says. He thinks Blackstone’s asset growth will power the stock past its peers.
Manager: Mark Travis
Fund: Intrepid Capital Disciplined Value (ICMCX )
The correction was bad enough in large-company stocks, but small-company stocks were walloped. “Someone screamed Fire! and there was just one exit in the back of the theater,” Travis says.
Skechers (SKX, $25.27) is one stock that got burned, according to Travis. Worries about the trade war with China accounted for part of the footwear maker’s fall (some Skechers products are produced there). Shares trade at nearly 15 times the company’s free cash flow (the money generated after operating expenses and spending to maintain or expand the business), compared with nearly 20 times for the average apparel stock.
Skechers’ balance sheet appears strong enough to see it through much of the retail industry’s headwinds.
“Skechers is a mispriced security, as far as we can tell,” Travis says.
Fund: Intrepid Capital Disciplined Value (ICMCX)
Another mispriced security, by Travis’s reckoning, is Cabot Oil & Gas (COG, $24.18), an exploration-and-production company concentrated in Pennsylvania’s Marcellus Shale.
Taking on too much debt is the biggest risk for oil producers, says Travis; Cabot’s balance sheet is conservatively managed. And the company is committed to sending half of its free cash flow to shareholders via dividends and buybacks, Travis says.
Manager: Bill Nygren
Fund: Oakmark Fund (OAKMX)
One of the unusual things about the market in recent months is how disconnected stock prices became from business results, says Nygren. “A lot of companies with fundamental business models that are not broken are selling for very low price-earnings ratios,” he says.
Nygren still likes Citigroup (C, $56.69), one of his top holdings, which currently trades at eight times analysts’ estimates of 2019 earnings. “Citi is uniquely positioned to be a global bank. It doesn’t seem as if a lot has to go right for the stock to do well,” he says. In the meantime, Citi sports a hefty dividend yield of 3.2%.
The company also has an ongoing share-buyback program, which should give remaining shareholders a bigger slice of the earnings pie.
Another of Nygren’s bargains is American Airlines (AAL, $31.80), selling at six times estimated 2019 earnings.
The U.S. airline industry is essentially an oligopoly now, with American Airlines weighing in at No. 4 by current market value.
Since this past summer, airlines have been pricing tickets assuming that oil would be selling at $70 a barrel, says Nygren. “People don’t get refunds because oil has since fallen to $50,” he says. Furthermore, as businesses become more global, travel should keep growing, he adds. American is using most of its excess capital to repurchase shares, with enough in its buyback plan to soak up 11.2% of outstanding shares.
Manager: Ian Sexsmith
Fund: Parnassus Fund (PARNX)
If you have a private-label credit card from a retailer, you probably have had contact with Alliance Data Systems (ADS, $167.47). Given the recent trends in retailing, store-based credit cards might not sound appealing. But Alliance Data is also a full-service digital-marketing agency and loyalty-program manager—and that’s what will keep the company chugging into the future, Sexsmith thinks.
The stock got folded, spindled and mutilated in the recent downturn—over the past 12 months it has fallen 38.2%, counting dividends, and currently sells at the bargain-basement level of seven times estimated 2019 earnings.
“The stock got completely crushed,” Sexsmith says. “There’s no way that’s the right price.”
Sexsmith also thinks investors got it wrong with FedEx (FDX, $170.99), whose stock has lost 36.3% over the past 12 months. “FedEx is the best in the world at what it does, and it’s gaining market share on UPS,” Sexsmith says.
Although investors worry about increased competition as Amazon.com rolls out its own delivery service, its nascent enterprise holds less than 3% of FedEx’s share of the delivery business, he says.
Manager: Jon Christensen
Fund: Virtus KAR Small-Cap Growth (PSGAX)
There’s nothing Virtus managers like more than great businesses whose stocks get swept up in a market downturn. Brooks Automation (BRKS, $28.08), which tumbled from a high of $40 in August 2018 to a low of $23 in December, “took a pretty good hit,” says Christensen.
The firm has two main segments: semiconductors and life sciences. The latter, which focuses on tissue-sample storage and gene sequencing, is the more promising of the two.
“Life science is what we’re interested in,” Christensen says. The segment should eventually overtake the company’s semiconductor business, and the firm “will be a health care company, focused on making health care more efficient,” he adds. “We like this story a lot for the longer term.”