Baseball fan Warren Buffett has compared himself to a batter who can take as many pitches as he likes until he gets a fat one to swing at. But the legendary head of Berkshire Hathaway said at the company’s virtual annual meeting May 2 that he hasn’t found any stocks that tempt him. He’s effectively keeping his bat on his shoulder, with $137 billion in Treasury bills and other cash equivalents.
In contrast, in past stock drops, the Oracle of Omaha has taken a cut at bargains that Mr. Market served up. In part, his current stance could stem from the lack of special deals offered to Berkshire (ticker: BRK.A) this time by companies in need of capital, including recently Occidental Petroleum (OXY), which got a $10 billion infusion via preferred stock issued to Berkshire.
The lack of supplicants might be traced to the Federal Reserve’s massive liquidity infusion and unprecedented backing for the corporate credit market. But Charles Lieberman, chief investment officer of Advisors Capital Management, posits another possible explanation: If Buffett is willing to pay X for a certain investment, sellers suspect it might be worth a significant premium to that number.
Lieberman and other value-oriented investors have found stocks worth buying, although they might not be in the “elephant” class that Buffett needs to move the needle for Berkshire’s nearly $200 billion stock portfolio over the long term—three years or more—particularly given the massive uncertainties resulting from the coronavirus crisis.
Edwin “Tim” Johnston III, head of Sandhill Investment Management, says he’s assembled a “Covid-proof” portfolio. It avoids sectors in which recoveries obviously will be long in coming, such as airlines, from which Buffett exited, and anything in the “airline supply chain,” as well as restaurants, hospitality companies, and the like. He declares himself a long-term bear on energy, although it could have a “dead-cat bounce,” along with banks, which he contends are just beginning to see “the tip of the iceberg” of bad loans and bankruptcies.
Keurig Dr Pepper (KDP) is among his picks. Johnston views it as a rare company that’s growing sales and margins, powered by its 80% share of the market for K-cups, especially those sold under the Starbucks (SBUX) brand, for single-serve 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 the coffee shops reopen.
In contrast, “everything that can go wrong has gone wrong” for another of his selections, Mohawk Industries (MHK), the flooring maker with ties to housing, another of Johnston’s picks. Cyclical stocks should be bought when everything looks bleak, however, and the stock now trades at about half its high of late last year. Consumers’ first purchases in a recovery will be home-related, for upgrades and remodeling, he suggests, even if they don’t buy a new or second house.
An eventual consumer recovery also should benefit TransUnion (TRU), which Johnston calls the best of breed in the oligopoly of credit-reporting companies. Its near-term results are apt to be terrible, he observes, but when the world recovers—and, with it, credit checks for automobile loans—TransUnion should see an “easy recovery,” unlike airlines, which will have planes sitting on the ground as consumers eschew travel.
Another value investor, Christopher Davis, who heads the eponymously named Davis Funds, is a longtime holder of financial stocks and an unabashed fan of bank shares. Unlike after the financial crisis, in which banks faced “existential threats,” he says, their balance sheets are vastly stronger and have been stress-tested for a Great Depression scenario that would last three years, which nobody thinks could happen now.
That said, Davis sees the biggest opportunities in the banks that have sold off the most and face the most problems. That leads him to Wells Fargo (WFC) and Capital One Financial (COF). Both were cheap to begin with and then fell more than their peers. That means they offer “a discount on a discount,” he argues.
Wells Fargo is about where Bank of America (BAC) was three or so years ago in turning itself around from its problems, Davis opines. “BofA had a hangover for many years, but had a better-than-average business and a no-nonsense CEO who worked on execution and repairing its reputation with regulators,” he says. He sees similar progress under Wells’ recently named chief executive, Charles Scharf.
Capital One’s mainstay credit-card business faces clear challenges from the impact of soaring unemployment. Certainly, the bank will take more loan losses in the near term, but Davis says it will be able to absorb them. Under founder and CEO Rich Fairbanks, Capital One is the most innovative bank, he adds, with a data-driven, unemotional approach.
While these portfolio managers’ picks emphasize longer-term prospects, Lieberman prioritizes income, along with growth, for his portfolios, which he says leads him to areas others fear. One example: LTC Properties (LTC), a real estate investment trust that invests in senior housing and nursing homes. A 6.8% yield reflects the risk from possible increased expenses and regulation, owing to coronavirus deaths at nursing homes.
Lieberman also likes Williams Cos. (WMB), a natural-gas pipeline operator that’s been battered along with other energy-related stocks, even though demand has fallen less for gas than for the crude oil used for gasoline and other fuels. Williams shares yield 8.3%, or roughly half again the yield on the iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (HYG). (It isn’t a master limited partnership, like some other pipeline companies.)
In the realm of corporate credit risk, Lieberman favors Ares Capital (ARCC), one of the largest business-development companies. BDCs, nonbank lenders to small-to-mid-size businesses, face substantial loan-loss risks, but Lieberman says that Ares has one of the sector’s best track records. And for those undeniable risks, you get paid 12.1% currently.
Finally, Lieberman likes Dow (DOW), the commodity chemicals maker spun out from the former DowDuPont; it’s another cyclical to be bought in tough times. Lieberman sees Dow’s 8.5% dividend yield as safe, with the well-managed company generating annual free cash flow of $2.6 billion.
To be sure, the stocks favored by these three value investors could be vulnerable to a pullback, along with the rest of the market, after the 33% surge in the S&P 500 from the March lows. But even with the current uncertainties, these stock pickers are confident of their prospects on the other side of this downturn.