This dividend fund is down 3% from S&P’s 20% decline. Here are his top stock picks
Now, even the most ardent tech and growth stock enthusiasts realize the bull market is over. John Kornitzer’s approach to selecting high quality stocks for the Buffalo Flexible Income Fund worked well during the bear market.
High inflation, uncertainty in so many industries amid supply chain issues and labor shortages, the Federal Reserve’s monetary policy tightening and the end of federal stimulus during a pandemic meant that investors needed to focus more on quality and safety.
Value stocks have held up relatively well this year, but check out the results of Kornitzer’s strategy for Buffalo Flexible Income Fund BUFBX,
through June 21, versus the S&P 500 SPX,
the value and growth subsets of the benchmark and the Dow Jones Industrial Average DJIA,
(All performance figures in this article include reinvested dividends):
The fund was down just 3% — a remarkable performance as the S&P 500 fell 20% and the value subset of the benchmark fell 12%.
Kornitzer Capital Management was founded in 1989, is based in Mission, Kansas, and has $7 billion to $8 billion in assets under management, including all 10 Buffalo funds and private and institutional clients.
The Buffalo Flexible Income Fund was established in 1994 and has $455 million in assets. Its objectives are to provide investment income and capital growth. It may invest in bonds, but is now almost entirely invested in large-cap stocks. The fund’s dividend income is enhanced by writing covered call options, a strategy described in detail here.
A call option is a contract that allows an investor to buy a stock at a given price until the option expires. A covered call is one you write while you already own the stock. Kornitzer said he sells covered calls deep “out of the money,” so he would only be forced to sell a stock if it rose at least 20%, when he would be likely to cut or sell a position anyway.
Dividends and growth at a reasonable price
“I like companies that pay a dividend,” Kornitzer said. “If I hold a stock paying 3% for 10 years and the stock stays stable, I’ve gotten 45% of my money back.”
He also cited two non-dividend payers as examples of how things can go wrong for long-term investors:
Shares of Meta Platforms Inc. META,
(formerly Facebook) have fallen 53% this year. The stock is down 23.5% from the end of 2019, although it has gained 33% in 2020 and another 23% in 2021. “You went up and down and paid nothing,” Kornitzer said.
CVNA of Carvana Co.,
the stock has plunged 89% this year. The company was founded in 2012, went public in 2017, and has since reported quarterly earnings (the second quarter of 2021) and no annual earnings. “If your sales are growing by hundreds of millions a year and you’re not making a cent, there’s something wrong,” he said.
When asked if corporate cash flow is particularly important, Kornitzer pointed to “shareholder cash flow.” He prefers companies with relatively low debt, growing profits “and all that goes with it.”
“You want a strong business that’s going to survive,” he said.
The Buffalo Flexible Income Fund’s portfolio dividend yield is about 3%, Kornitzer said. He agreed that a reasonable target for improving his earnings through covered call writing would be another 1%.
When adding stocks to the portfolio, Kornitzer said he generally looks for a minimum dividend yield of 2% to 3%. But a Buffalo Flexible Income Fund stock may have a low current dividend yield. Microsoft Corp. MSFT,
is an example, with a yield of only 0.98%. However, Kornitzer said that based on its original cost, the fund’s Microsoft stock yield was now over 10%. (Click here to learn more about compounding dividends over long periods.)
He said he reduced his Microsoft holdings “from $340 to $350”, adding that Microsoft was attractive again when it recently fell below $250.
This year’s success
Kornitzer cited the fund’s 20% concentration in energy stocks as one of the reasons for the outperformance, although he said he had “sold a lot this year already”. An example was Hess Corp. HES,
that he sold for about $130 per share. Hess closed at $107.74 on June 21.
Kornitzer has emphasized an active management style, which includes eliminating positions if they become too large or selling outright when stock prices reach his targets.
As of March 31, the fund’s largest energy position was Chevron Corp. CLC,
The stock is up 34% this year and its dividend yield is 3.67%.
Kornitzer thinks the energy sector can perform well from here, even if oil prices have retreated slightly from their highs. West Texas Intermediate (WTI) crude oil for delivery in July CL.1,
was trading at $104.48 a barrel at the start of June 22, down from a first-month intraday peak of $130.50 on March 7, according to the rolling first-month contract CL00,
“Wait for people to see second quarter earnings from these companies – it will be amazing,” he said.
The fund reports its holdings quarterly. As of March 31, other energy names among its top holdings were ConocoPhillips COP,
APA Corp. APA,
and Exxon Mobil Corp. XOM,
Kornitzer said holding “the right drug stocks” also fueled the success of the Buffalo Flexible Income Fund this year. He named Eli Lilly & Co. LLY,
for example. The stock is up 8.5% this year and the dividend yield, based on the cost of the fund, is around 11%, Kornitzer said. He reduced the position to make it about 3% of the fund’s portfolio.
Eli Lilly recently increased its dividend by 15% in December.
He likes to hold insurance companies for the long term, for a continuous increase in dividends. An example is Arthur J. Gallagher & Co. AJG,
which increased its dividend by 6% in January. Another is Allstate Corp. ALL,
who increased his payout by 5% in February.
“So far this year, 70% of our companies have increased their dividends,” Kornitzer said.
Asked about opportunities to buy stocks after a major price drop, Kornitzer suggested long-term thinking: “Any company supporting robotics will have a bright future,” he said. “Visit any large industrial plant today and they set up robots if they can’t hire anyone. They don’t fire anyone.”
An example in this area, where it “starts to build positions”, is ABB Ltd. ABB,
which has a dividend yield of 2.61% and has fallen 28% this year to be in Kornitzer’s “range”.
Now read: Four value stock picks from a fund manager who avoids the energy sector
And: Here is a winning investment strategy for a long period of commodity shortages