In last week's column, John Buckingham, chief investment officer of Al Frank Asset Management, made the case for using a value-oriented approach - investing in companies trading at low multiples of earnings, especially when those earnings are depressed and due for a bounce - to try to capture the further gains he expects in the stock market and to benefit from long-term growth trends. His place among the top 1 percent of diversified domestic equity funds over the last decade shows that the formula works.
Buckingham advocates a broadly diversified portfolio; he likes hundreds of stocks rather than dozens, as many other professional investors do. He highlighted a handful of his selections in an interview with MoneyWatch, some big and familiar to most, others small and obscure.
With his emphasis on value, he prefers "things that haven't had gigantic moves" during the rally of the last two months. That includes the pharmaceutical sector, which he noted "has been a dog for quite a while."
A top selection in the field is Abbott Laboratories, which makes medical devices and health-related consumer products, along with drugs for a variety of ailments. The stock carries a below-market valuation and a nearly 4 percent dividend yield.
A healthier yield, although not a healthier product, is available from Altria, which sells Philip Morris tobacco brands. While maybe not a stock for those with a finely honed sense of moral outrage, it has the virtues of steady earnings growth, a 7.5 percent yield and a low valuation of 11 times earnings, making it a good holding "for people willing to tolerate sin," Buckingham said.
Pure Play on Oil
Transocean, a leading oil driller, trades at just five times earnings. The swoon in oil prices is likely to translate into a steep decline in earnings this year, but at such a low valuation, the stock seems prepared for the worst. The worst may not be so bad, Buckingham said, because the company has long-term contracts that insulate it from the ups and downs of the oil market, and he expects more ups than downs for oil in the years ahead.
One of his favorite technology stocks, Microsoft, has a lot of cash on its balance sheet, a below-market valuation and a near monopoly in personal computer operating software that should allow it to grow earnings at a higher rate than the broad market over the long term.
Tech stocks big and small feature prominently among Buckingham's preferred stocks. His tech minnows of choice include Rackable Systems, which is in the data storage business, and MTS Systems, which makes electronic instruments and sensors.
Both companies have valuations well below that of the broad market, along with plenty of net cash on their books. Rackable has about $5.70 a share in cash, no debt and a share price below $5. Investors can buy a going concern literally for less than nothing.
The same goes for Syneron Medical, a maker of medical lasers. Demand for elective surgery has fallen, cutting earnings and reducing demand for the stock so much that it trades for about $6.75 a share, a buck less than the net cash it holds. Buckingham expects the stock to recover when human nature begins to work in its favor.
"People are less likely to have work done with the economy down," he said, "but do we really think that vanity has gone away? We like companies that operate in industries with good long-term growth potential at times when they're depressed."