7 Themes for Stock Investing in 2023: John Buckingham

These are all long-term survivors and thrivers that have been hit hard this year. They have great balance sheets and are likely to weather the short-term difficulties to continue to gain market share and grow over the long haul. You get above-average growth at reasonable prices.

We first bought Apple many years ago. Our top basis in Apple is 39 cents. Apple is down 20% this year. So, is Apple a bad stock or a good stock for us? This year it’s bad. Overall, it’s great.

Google and Meta are fantastic companies with tons of cash, minimal debt relative to that cash and are buying back lots of stock.

A third theme is “Consumers Are Still Hanging In.” Please elaborate.

Retailers Target and Nordstrom, and toymaker Hasbro are all experiencing short-term difficulties but are going to thrive in [due course].

Target over-ordered merchandise when they couldn’t get it because of the backup of container ships. Hard-hit Nordstrom is poised to rebound.

Hasbro has had issues relating to collectors’ concerns that they overprinted trading cards. It was a supply-chain issue.

Your next theme is “The Fed Punches a Hole in the Punch Bowl.” Please explain.

The Federal Reserve has increased interest rates across bond-land, but this should benefit regional banks like Citizens Financial and Bank OZK. The large money centers, like Bank of America and JPMorgan Chase, have diversified money streams and reach.

There’s value to be had at the banks, plus you’re getting nice dividends that are increasing because the banks are becoming more profitable.

However, even though they’ve done well generally relative to the overall market, they had a pullback of late.

Theme number five is “EV’s Are Accelerating. But Fossil Fuel Is Not Going the Way of the Dinosaur.”

Everybody is excited about electric vehicles. General Motors [for example] is putting a lot of money into its internal-combustion-engine cars and using that [profit] to finance its EV initiative. It’s moving up its “electrification” plans by years.

Tesla has been a disaster in terms of its stock this year. It’s not going bankrupt. But in order to buy Tesla, you’re paying a very high multiple. I’d much rather own GM.

Oil deserves a place in the portfolio, and two very good names are Civitas Resources and EOG Resources. We’ve seen oil stocks do extremely well this year, but I think there’s going to be a supply problem; we don’t have incentives for companies to go out and explore oil because of government regulations.

So the legacy companies that have already made investments are likely to be the beneficiaries when we have the inevitable oil price spikes [during] geopolitical events that cause concern about the global supply chain.

The situation around oil is always going to be a headwind because oil pollutes the environment, even though electric vehicles might actually create more greenhouse gases because you have to dig lithium out of the ground for EV batteries, and there’s an environmental cost of doing that.

Then you have to charge the batteries, which is usually fueled by fossil fuel.

What are your thoughts of investing in companies whose products go into making batteries?

You’ll need more and more lithium to satisfy the demand for batteries. Albemarle is a company that produces lithium. It’s trading at less than 10 times earnings. So even though it’s done extraordinarily well, it’s still reasonably priced.

We consider the electric vehicle “gold rush” in the early stages. Albemarle is a “pick-and-shovel company,” selling products to the “gold miners” [as it were]. They aren’t going to be the ones to find the gold, but they’ll get rich selling stuff to everybody searching for the gold.

The next theme is: “It’s a Great Big World Out There.” You’re talking about international?

Right. International markets have performed poorly this year in their own currency; and because the dollar has been so strong, when you translate it into U.S. dollars, they’ve been a disaster.

But Europe will ultimately emerge on the other side of its recession. I want to invest in businesses that are going to make it through, such as Deutsche Post; DHL [couriers] is a division. Deutsche Post also is a German mail carrier.

Sanofi is a French drugmaker. They’re a big name in drugs in Europe and have a nice dividend, but they’ve lagged behind — and that’s the reason we like it.

Manpower Group, a staffing services company, is heavily exposed to Europe. They‘ve been in business for seven decades and profitable. I think they’ll do just fine.

This is the time you want to be buying European-exposed companies.

The seventh theme is “Good Things Come in Small (and Mid) Packages.” Why do you like some of these stocks?

Over the last decade or so, large caps have outperformed small caps, which have lagged, though historically, small- and mid-cap have outperformed large cap over the long term.

We essentially invest using strategies that have done well historically and think that they’ll continue to do well.

I like exposure to U.S.-based companies that are trading at very reasonable valuations.

Four companies have been hit hard this year.

Greenbrier Cos., a railcar manufacturer, has already had their downturn and are likely to see another upswing in 2023 or 2024.

MDC Holdings is a homebuilder. The housing market has been hit very hard. But there’s still a shortage of housing in the U.S. MDC is very well capitalized. They have a dividend yield of over 6%, and that’s been increasing. Over the years, they’ve had 7% or 8% stock dividends.

Lumentum, an optical and photonic [lasers, optical fibers, for example] product supplier of networking equipment, has been extremely hard hit on worries about overall tech spending. But we think that substantial profits are likely to continue going forward. Though a lot of companies’ stocks have been hit hard, their earnings have not been. That’s the fascinating thing.

[The final stock included in this seventh theme is] EnerSys, which makes industrial batteries, like fork-list batteries. There had been a big boom in warehouse expansion, but the economic slowdown has [brought that] to a screeching halt. So that part of its business is struggling.

The stock price has reacted violently on the downside far more than it should based on what we think is their long-term earnings goal.

Broadly, what do you foresee for corporate earnings in 2023?

Profits are going to continue to be healthy because nominal growth is likely to be strong even if real growth is negative.

Corporate profits are measured in nominal dollars. Generally, companies can pass on higher costs to their customers, and so stocks historically have been a very good inflation hedge.

What’s one thing that guides your investing?

There are all sorts of historical [statistics] that say that when the economic numbers are awful, that’s when you want to be buying stocks, not when you want to be selling.

John Buckingham (Photo: Andrew Collins)