Right now, even the most ardent tech enthusiast and growth enthusiast realizes that the bull market is over. John Kornetzer’s approach to selecting high-quality stocks for the Buffalo Flexible Income Fund is one that has worked well during a bear market.
Rising inflation and uncertainty in many industries amid supply chain issues, labor shortages, tighter Fed monetary policy and the end of the pandemic-era federal stimulus mean investors are better focused on quality and safety.
Value stocks have held up relatively well this year, but check out the results of Kornetzer’s strategy for the Buffalo Flexible Income Fund BUFBX,
As of June 21, compared to the S&P 500 SPX,
The value of the benchmark index, growth subgroups and the DJIA Dow Jones Industrial Average,
(All performance numbers in this article include reinvested dividends):
The fund is down just 3% – an astonishing performance as the S&P 500 Index is down 20% and the benchmark index’s subset is down 12%.
Founded in 1989, Kornitzer Capital Management is headquartered in Mission, Kansas, and has between $7 billion and $8 billion in assets under management, including 10 Buffalo funds and private and institutional clients.
The Buffalo Flexible Income Fund was founded in 1994 and has $455 million in assets. Its objectives are to provide investment income and capital growth. It can invest in bonds, but now it invests almost entirely in large-cap stocks. The fund’s dividend yield is enhanced by writing covered calls, a strategy discussed in detail here.
A put option is a contract that allows an investor to buy a stock at a certain price until the option expires. A covered call option is one that you write when you already own the stock. Kornitzer said he’s selling deeply covered calls “out of the money,” so he’ll only have to sell the stock if it’s up at least 20%, while he’d likely cut or sell the position anyway.
Dividends and Growth at a Reasonable Price
“I like companies that pay dividends,” Kornitzer said. “If I had a stock that pays 3% for 10 years and the stock stayed flat, I got 45% of my money back.”
He also cited two non-dividend payers as examples of how bad things can be for long-term investors:
Shares of Meta Platforms Inc. dead,
+ 1.14%And the
(formerly Facebook) is down 53% this year. The stock is down 23.5% compared to the end of 2019, though it’s up 33% in 2020 and another 23% in 2021. “I got on it, and I rode it down and you got nothing,” Kornitzer said.
CVNA for Carvana Corporation,
The stock is down 89% this year. The company was founded in 2012, went public in 2017 and since then has reported a quarterly profit (Q2 2021) and has not generated an annual profit. “If your sales go up by hundreds of millions a year and you’re not making a penny, something is wrong,” he said.
When asked if corporate cash flows are particularly important, Kornetzer emphasized “shareholder cash flow.” He prefers companies with relatively low debt, increasing profits “and whatever goes with it”.
“You want a strong company that will last,” he said.
Kornitzer said the dividend yield for the Buffalo Flexible Income Fund portfolio is about 3%. He agreed that a reasonable goal to boost his income by writing the covered call would be another 1%.
When adding stocks to the portfolio, Kornitzer said he typically looks for a minimum dividend of 2% to 3%. But the stock in the Buffalo Flexible Income Fund may have a low current dividend yield. Microsoft Corporation. MSFT,
Example, with a return of only 0.98%. However, Kornitzer said that based on its original cost, the return on Microsoft stock in the fund is now more than 10%. (Click here for more information on accumulating profits over long periods.)
He said he had trimmed his Microsoft holdings “from $340 to $350,” adding that Microsoft was attractive again when it dropped below $250 recently.
success this year
Kornitzer cited the fund’s 20% concentration in energy stocks as one of the reasons for the outperformance, although he said it “already sold a group this year.” One example is Hess Corp. HES,
which sold for about $130 a share. Hess closed at $107.74 on June 21.
Kornitzer emphasized an active management style, which includes cutting positions if they become too large or selling outright when stock prices reach his targets.
Chevron Corp. was the fund’s largest energy holding as of March 31. CVX,
The stock is up 34% this year and its dividend yield is 3.67%.
Kornitzer thinks the energy sector can do well from here, even with oil prices pulling back a bit from their peak. West Texas Intermediate (WTI) Crude for July CL.1 Delivery,
It was trading at $104.48 a barrel early on June 22, down from the intraday forward month price peak of $130.50 on March 7, according to the upcoming month’s ongoing contract CL00,
“Wait until people see the second-quarter earnings of these companies — that would be unbelievable,” he said.
The Fund issues quarterly reports on its holdings. As of March 31, other energy names among its biggest holdings are ConocoPhillips COP,
APA Corp. what or what,
and Exxon Mobil Corporation. XOM,
Having “the right drug inventory” fueled the success of the Buffalo Flexible Income Fund this year, Kornitzer said. appointed Eli Lilly & Co. LLY,
as an example. The stock is up 8.5% this year and the dividend yield, based on the cost of the fund, is about 11%, Kornitzer said. He’s downsized the site to about 3% of the fund’s portfolio.
Eli Lilly recently raised its dividend by 15% in December.
He likes to hold insurance companies for the long term, for steady increases in profits. One such example is Arthur J. Gallagher & Co. AJG,
which raised its dividend by 6% in January. Another is Allstate Corp. All,
which raised its payments by 5% in February.
“So far this year, 70% of our companies have collected profits,” Kornitzer said.
I look ahead
When asked about stock buying opportunities after the big price drops, Kornitzer suggested some long-term thinking: “Any company that supports bots will have a bright future,” he said. “Visit any big industrial factory today and they are using robots if they cannot hire anyone. They are not laying off anyone.”
One example in the field, where it “begins to build positions” is ABB Ltd. ABB,
which has a dividend yield of 2.61% and is down 28% this year to Kornitzer’s “range.”
Read now: Four selections of valuable stocks from a fund manager who is staying away from the energy sector
And the: Here is a successful investment strategy for a long period of commodity shortage