With Annell Danczyk and Brian Lazorishak, Senior Portfolio Managers at Stack Financial Management
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Picking Individual Stocks for Stock Market 2017
For the second part of their discussion, Steve turns to stock picking strategies and the research which support it. Having defined “valuation analysis” and “growth at a reasonable price” as two poles on the strategy continuum, for the purposes of argument, Steve asks Brian and Annell to elaborate on their approach. Annell admits to a bias towards “growth at a reasonable price” overvaluation, though she adds that “asset protection” remains a cornerstone as well. “Asset protection” is achieved by maintaining a “cash buffer” and shifting portfolio allocations to follow market cycles.
By way of a quick overview of “growth at a reasonable price”, Brian outlines an analytical lens which rates the competitive advantages, superior profitability, and financial strength of individual companies. Companies with intrinsic competitive advantages are more profitable in the long run and pass those profits on as dividend returns as well as capital appreciation. Brian views valuation—again, P/E, or stock price relative to earnings—as a kind of “built-in protection” against price declines. He nuances this observation to say that, in his approach, the idea is not to find the cheapest, most undervalued stocks so much as it is to pass on highly valued companies with less upside to their equity.
Index Funds and Asset Protection
Steve brings up the question of index funds, noting that while he often recommends them to clients, he also feels that investors won’t find much reassurance that they own quality companies during a market downturn. Brian expands on this, asserting that a well thought out selection of individual stocks can preserve assets better in a market downturn. He agrees that index funds are widely and legitimately used by many private investors as well as fund managers, but qualifies this by arguing that, to some degree, a passive instrument like an index fund looks better during a bull market than it will over the course of multiple market cycles.
Finally, Steve wraps up the conversation by turning to interest rates and inflation. The Federal Reserve raised the Fed Fund rate by 0.25% at the end of 2016, and the yield on longer-term bonds moved up accordingly. Steve wonders whether the rate hikes, along with possibly large economic stimulus in the form of infrastructure programs launched by the new Administration, will add to inflationary pressures. Brian replies that he sees inflation largely under control for the moment but admits that pre-inflation factors like wage growth and a tighter job market could foreshadow more rapid inflation. He asserts that the Fed will feel pressed to “normalize” (increase) rates if they detect an increase in inflationary signals.
Annell and Brian will be speaking together at the MoneyShow Orlando on February 9th: Is a Bear Market Looming in 2017: Where to Watch and February 10th: The Worst & The Best: Where to Survive & Thrive in the Next Bear Market.
Steve will be speaking on February 10th: Myth Busting Your Way to Riches.
For more information on the MoneyShow Orlando and to register for free, click here.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Well, I want to introduce, re-introduce, my guests today. They are Annel Danzek and Brian Lazorishak, Senior Portfolio Managers for Stack Financial and, as you were listening to the former segment, our previous segment, just a few moments ago, they will be speaking at the MoneyShow in Orlando on February 9th. Again, for those of you who may be unfamiliar with it, the MoneyShow Orlando features lots of investors, investing and trading experts, and it’s held this year at the Omni resort, February 8th through the 11th, and I will be speaking at the show as well on February 10th. To register, you can go to Orlandomoneyshow.com or come to Stevepomeranz.com, either way, that will get you to the show to register. I don’t believe there’s any cost for registering. There isn’t.
Okay. So, Annel Danczyk and Brian Lazorishak, welcome back. We were talking in the last segment about the market and the technical indicators of the market. We were talking about high valuations, PE ratios, and those kinds of things which people look at, and you were mentioning some technical factors that you look at to kind of see if there are any warning signs. You guys buy individual stocks so when you go out and make an investment decision, or you’re researching, what are the metrics that you use to make a decision as to buy a particular company?
Brian Lazorishak: It’s an excellent question. It’s actually one of the things we do a workshop on at the Money Show conferences is talk about what we look for in stocks. You know, one thing I hope everybody understands about us is everything we do is very data driven. The basis for one of our presentations was taking a look back at some of the best performing stocks over the last thirty years and what characteristics they had before that time. We kind of narrowed it down to several things that we try to emphasize in our own portfolios for clients—things like superior profitability, competitive advantage. You know those firms that have a real, true competitive advantage tend to have better returns over long time periods. They have to have financial strength. They have to be a solid financial organization and then valuation and one of the things … We look for valuation as a measure of … as kind of some built-in protection, if you will. It’s not necessarily that you need to go out and find the cheapest stock, but rather avoiding the most highly valued ones can help you to avoid some real problems.
Steve Pomeranz: Would you guys characterize yourselves as value investors or growth at a reasonable price investors or …? How would you guys … What category would you put yourself in, if any?
Annel Danczyk : Sure, we really would put ourselves, if we had to, in a category more growth at a reasonable price but, our main goal, in our management style, is to preserve assets, especially in a bear market— bear market as much as possible—and participate in the upward swing of a bull market, as much as possible as well.
Steve Pomeranz: Hard to do.
Brian Lazorishak: Hard to do, that’s right. We know in the bear market we won’t … We’re, of course, susceptible, but if we can minimize that by using our cash buffer, which we can describe in a little bit, because we’ll change our allocation, methodically throughout the course of the market cycle.
Steve Pomeranz: There’s this very big discussion about buying individual stocks versus buying plain indexes, broad market indexes like the S&P 500, and others, and even kind of chopping it up using ETFs to buy other sectors of the market or sections of the market or looking at buying stocks with high dividends or low dividends, whatever it may be. You guys are buying individual stocks, you obviously believe in that method, so kind of give me the discretion … An idea the discretion you guys have when you’re looking at these indexes and this massive move of money towards indexes versus what you guys do.
Brian Lazorishak: First, it’s interesting, and, we’d say, I don’t think it’s any secret the market tends to move toward—and the general investor tends to move toward—indexing late in bull markets when it’s worked for a long time. You know there are frankly periods in the market where paying attention to some of the things we just mentioned, financial strength and superior profitability, don’t get you much in terms of absolute return. Those things tend to help you more during the difficult times, so there’s definitely been a shift toward indexing and, from a broader industry standpoint, some of it makes sense in that a lot of the industry has been closet indexers for some time and if you’re going to hire a mutual fund manager who’s essentially going to buy the index, why pay an active management fee? So, we can understand that side of that, but we do think there is value to be added through individual stock selection and it typically comes during the more difficult times in the market. Since we’re quite a distance and a return percentage removed from difficult times, people tend to kind of forget about that and shift toward more passive instruments.
Steve Pomeranz: Yeah, it’s an interesting way to put it. I, personally, use a lot of index funds and we do have some managers that we employ that buy individual stocks. Psychologically, I will tell you that in a bear market it’s nice to know if you’ve got good quality stocks. I think it’s easier for people to identify with them, to go “Hey, you know Johnson & Johnson isn’t going out of business. Proctor & Gamble isn’t going out of business.” You know … Whereas when you have an index fund it’s like … You know … It’s this closed … It’s like this box, you don’t know what it is. The S&P 500 is just a number that goes up and down and you make money or you lose money. I think there’s a comfort in knowing what the individual stocks in your portfolio. So, I would say to my listeners, you know, if we do enter a down market and you own index funds, go in. Go in to Yahoo Finance and put in the symbol and look at holdings. I think it will make you feel a little bit better about that. You guys are talking about valuations; you guys just look at U.S. markets; so, in your portfolios, you don’t necessarily have any exposure to any foreign markets or bonds?
Annel Danczyk : You’re right, we do look at just U.S. markets from the standpoint in our portfolio we are looking for companies that trade in U.S. Indexes. Some of those might be companies that are actually domiciled in other countries but trade here and have a trading volume we feel is comfortable for the type of stock that we would own in our portfolio. We do also monitor other countries and indexes for other countries. The major ones as indicators of the overall health of the global economy and the reason for that is, of course, even though the companies that we’re putting in the portfolio maybe U.S. companies or traded on the U.S. market, their revenues come from all over the world.
Brian Lazorishak: A lot of them do.
Annel Danczyk : Many of them, not all, but many. Exactly. We see that we’re getting global diversification in that manner, but we find it in a safer way of doing it versus looking for companies that are not traded in the U.S. on the index.
Steve Pomeranz: You guys are located in Montana, right?
Annel Danczyk : Yes, we are. Just outside of Glacier National Park, that’s right.
Steve Pomeranz: So, I guess you’re, geographically speaking, you’re closer to Canada. That is a foreign market, but you’re about as far away from the foreign markets as anybody on the East Coast or West Coast probably. Also, I guess all of that snow and those buffalo may affect your thinking as well. I don’t know exactly how but … All kidding aside, let’s move on here and talk about inflation. We saw an uptick in interest rates; the Fed actually moved and—actually interest rates on longer-term government bonds which are not controlled by the Fed but controlled by investors—and moved, I think, mostly by the fear of inflation or the actual fact that we will or won’t have inflation, but the economy is in pretty good shape. It looks like 2017 is going to be a year of stimulus in the economy, whether it’s infrastructure and other things that President-elect Trump is promising right now, so we have … I don’t think we’ve ever actually seen stimulus in the economy in a time where we actually have a good economy. A lot of people are worried about inflation. Tell me what you guys think about inflation and what it means to your investing decisions.
Brian Lazorishak: Inflation is under control at the moment, but it’s been creeping up. We’ve … interestingly, we’ve started talking about it this summer, as a matter of fact, as we’re starting to see early indications of some of the precursors to inflation—wage growth, a tight labor market, some of these other things starting to creep into the equation, and that seems to be continuing and even accelerating a bit since the election. You mentioned the move up in bond yields. We’re looking at critical levels on those indexes somewhere in the neighborhood of 3% on the 10 year and 4% on the 30 year is being levels that are important—important signs that we’re moving in the other direction. The issue with inflation is that that will then feed into potentially Fed policy and could really be the wild card here because, as you said, the economy is kind of moving along at a nice pace and probably picking up a little bit and confidence is going to drive that and the wild card might be how much pressure there is on the Fed to act more quickly than they’ve indicated to really start by normalizing rates and then by raising them further.
Steve Pomeranz: Unfortunately, we are out of time. Our guests today have been Annel Danczyk and Brian Lazorishak with Stack Financial Management located in Montana, and they’ll be talking at the Money Show in Orlando on February 9th, and the show will be held at the Omni resort February 8th through 11th. I’ll be speaking at the show as well on February 10th, and to register you can go to orlandomoneyshow.com or come to our site and to hear this conversation again go to Stevepomeranz.com. That’s P-O-M-E-R-A-N-Z, stevepomeranz.com. Annel Danczyk, Brian Lazorishak, thank you so much for joining us.
Brian Lazorishak: Thank you.
Annel Danczyk : Thank you.