Baseball fan Warren Buffett has likened himself to a hitter who can throw as many pitches as he wants until he gets a big one to swing on. But the legendary chef
said at the company’s virtual annual meeting on May 2 that he couldn’t find any action that tempted him. He effectively keeps his bat on his shoulder, with $ 137 billion in treasury bills and other cash equivalents.
In contrast, during past stock drops, the Oracle of Omaha has cut back on the bargains that Mr. Market served. In part, its current position could come from the lack of special offers being offered to Berkshire (ticker: BRK.A) this time from companies in need of capital, including recently
(OXY), which got a $ 10 billion brew via preferred shares issued to Berkshire.
The lack of applicants could be attributed to the massive injection of liquidity from the Federal Reserve and the unprecedented support of the corporate credit market. But Charles Lieberman, chief investment officer at Advisors Capital Management, puts forward another possible explanation: If Buffett is willing to pay X for a certain investment, sellers suspect it could be worth a significant premium over that number.
Lieberman and other value investors have found stocks worth buying, although they may not be in the “elephant” class that Buffett needs to move the needle. Berkshire’s nearly $ 200 billion long-term stock portfolio – three years or more – especially given the huge uncertainties resulting from the coronavirus crisis.
Edwin “Tim” Johnston III, director of Sandhill Investment Management, says he has built a “Covid-proof” portfolio. This avoids sectors where the recovery will obviously be long in coming, such as airlines, of which Buffett is out, and everything in the “airline supply chain”, as well as restaurants, hotel companies. , etc. He declares himself a long-term bear on energy, even though it might have a “dead cat bounce”, as well as the banks, which he says are just starting to see “the tip of the iceberg”. bad debts and bankruptcies.
Keurig Dr Pepper (KDP) is one of his choices. Johnston sees it as a rare company with increasing sales and margins, thanks to its 80% share of the K-cup market, especially those sold under the
(SBUX), for individual coffee makers. “It’s the right stock at the right time,” he says, with more people getting their coffee fix at home, and for a lot less, even when cafes reopen.
On the other hand, “everything that can go wrong has gone wrong” for another of his selections,
(MHK), the manufacturer of flooring with ties to housing, another choice of Johnston. However, cyclical stocks should be bought when all is looking bleak, and the stock is now trading at around half of its high from late last year. The first consumer purchases in a trade-in will be home-related, for upgrades and renovations, he suggests, even if they aren’t buying a new or second home.
A possible recovery in consumption should also benefit
(TRU), which Johnston calls the best of breed in the oligopoly of credit reporting companies. Its near-term results are likely to be dire, he observes, but when the world turns around – and, with it, credit checks for auto loans – TransUnion should see an “easy recovery,” airlines, which will have planes sitting on the ground as consumers avoid travel.
Another value investor, Christopher Davis, who heads the eponymous Davis Funds, is a long-time holder of financial stocks and a die-hard fan of bank stocks. Unlike after the financial crisis, in which banks faced “existential threats,” he says, their balance sheets are much stronger and have been stress tested for a scenario of the Great Depression that would last three times. years, which no one thinks can happen now.
That said, Davis sees the greatest opportunities in the banks that have sold the most and face the most problems. This leads him to
Capital One Financial
(COF). Both were cheap to start with and then fell more than their peers. That means they are offering “a discount for a discount,” he argues.
Wells Fargo is where
Bank of America
(LAC) was about three years ago recovering from his problems, Davis believes. “BofA had a hangover for many years, but had a better-than-average company and a down-to-earth CEO who worked to enforce and repair his reputation with regulators,” he said. . He sees similar progress under recently appointed Wells CEO Charles Scharf.
Capital One’s core credit card business faces obvious challenges related to impact rising unemployment. Granted, the bank will take more short-term loan losses, but Davis says it will be able to absorb them. Under the leadership of founder and CEO Rich Fairbanks, Capital One is the most innovative bank, he adds, with a data-driven and emotionless approach.
While these portfolio managers’ choices focus on longer-term prospects, Lieberman prioritizes income, as well as growth, for his portfolios, which he says is leading him to areas that others fear. An example:
(LTC), a real estate investment trust that invests in retirement homes and nursing homes. A 6.8% return reflects the risk of a possible increase in spending and regulation, due to deaths from coronavirus in nursing homes.
Lieberman also likes
(WMB), a gas pipeline operator who has been beaten with other energy-related stocks, although demand has declined less for gas than for crude oil used for gasoline and other fuels. Williams shares return 8.3%, or about half more of the return on the
exchange-traded funds (HYG). (It is not a master limited partnership like some other pipeline companies.)
In the area of corporate credit risk, Lieberman favors
Capital of Arès
(ARCC), one of the world’s largest business development companies. BDCs, non-bank lenders to small and medium-sized businesses, face substantial loan loss risks, but Lieberman says Ares has one of the best track records in the industry. And for these undeniable risks, you are currently paid 12.1%.
Finally, Lieberman likes
(DOW), the manufacturer of chemicals from the former DowDuPont; it’s another cyclical value to buy in tough times. Lieberman considers Dow’s 8.5% dividend yield secure, with the well-run company generating annual free cash flow of $ 2.6 billion.
Admittedly, the preferred stocks of these three value-oriented investors could be vulnerable to a downturn, like the rest of the market, after the 33% rise in the market.
March troughs. But even with the current uncertainties, these stock pickers are confident in their prospects on the other side of this downturn.
Write to Randall W. Forsyth at [email protected]