By now, even the most ardent fans of technology and growth stocks are realizing that the uptrend is over. John Kornitzer’s approach to selecting high quality stocks for the Buffalo Flexible Income Fund is one that worked well during the bear market.
High inflation, uncertainty in so many industries amid supply chain issues and labor shortages, the Federal Reserve’s tighter monetary policy and the end of the pandemic federal incentive mean that investors need to focus better on quality and the safety.
Shares held relatively well this year, but look at the results of Kornitzer’s strategy for the Buffalo Flexible Income Fund BUFBX,
by June 21, compared to the S&P 500 SPX,
the benchmark value and growth subsets of the benchmark index and the Dow Jones Industrial Average DJIA index,
(All yield numbers in this article include reinvested dividends):
The fund is down just 3% – an impressive return as the S&P 500 has fallen 20% and the benchmark sub-total has fallen 12%.
Founded in 1989, Kornitzer Capital Management is headquartered in Mission, Kansas and manages assets of between $ 7 billion and $ 8 billion, 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 goals are to provide investment income and capital increase. It can invest in bonds, but now it invests almost entirely in large-cap stocks. The fund’s dividend income is boosted by drafting covered calls, a strategy discussed in detail here.
A buy right is a contract that allows an investor to buy a stock at a certain price until the right expires. A covered call option is the one you write when you already have the stock. Kornitzer said he was selling covered calls deep “for no money”, so he would only be forced to sell a stock if it was up at least 20% when he was likely to cut or sell a position anyway.
Dividends and growth at a reasonable price
“I like companies that pay dividends,” Kornitzer said. “If I have a stock that pays 3% for 10 years and the stock remains stable, I’ve got 45% of my money back.”
He also cited two non-dividend holders as examples of how bad things can be for long-term investors:
Shares of Meta Platforms Inc. META,
(formerly Facebook) have fallen 53% this year. The stock is down 23.5% by the end of 2019, although it gained 33% in 2020 and another 23% in 2021. “You raised it, you lowered it and you were not paid anything,” Kornitzer said.
CVNA of Carvana Co.,
The share has fallen 89% this year. The company was founded in 2012, went public in 2017 and since then has reported a quarterly profit (the second quarter of 2021) and no annual profit. “If your sales increase by hundreds of millions a year and you do not make a penny, something is wrong,” he said.
Asked if the companies’ cash flows were particularly significant, Kornitzer stressed “shareholder cash flows”. It prefers companies with relatively low debt, rising profits “and everything that comes with it”.
“You want a stable company that will survive,” he said.
The dividend yield for the Buffalo Flexible Income Fund portfolio is about 3%, Kornitzer said. It agreed that a reasonable target for boosting its revenue through covert calls would be another 1%.
When adding shares to the portfolio, Kornitzer said he usually seeks a minimum dividend yield of 2% to 3%. But a stock in the Buffalo Flexible Income Fund may have a low current dividend yield. Microsoft Corp. MSFT,
is an example, with a yield of just 0.98%. However, Kornitzer said that based on its initial cost, the return on Microsoft shares of the fund is now more than 10%. (Click here for more on dividend composition for long periods.)
He said he had reduced his stake in Microsoft to “$ 340 to $ 350”, adding that Microsoft was again attractive when it had fallen below $ 250 recently.
This year’s success
Kornitzer cited a 20% stake in the energy stock as one of the reasons for the overperformance, although he said he had “sold a lot this year”. An example was Hess Corp. HES,
which sold about $ 130 per 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 fall short of their targets.
The fund’s largest energy holding on March 31 was Chevron Corp. CVX,
The share is up 34% this year and its dividend yield is 3.67%.
Kornitzer believes the energy sector can perform well from now on, even though oil prices have fallen slightly from their peaks. West Texas Intermediate Crude Oil (WTI) for July CL.1 Delivery
traded at $ 104.48 a barrel at the beginning of June 22, lower than the previous month’s peak price of $ 130.50 on March 7, according to the CL00 continuous first month contract,
“Wait until people see second-quarter profits for these companies – it will be unbelievable,” he said.
The fund reports its dispositions on a quarterly basis. As of March 31, other energy names among its top stakeholders were ConocoPhillips COP,
APA Corp. APA,
and Exxon Mobil Corp. XOM,
Kornitzer said maintaining the “right stock of drugs” also fueled the success of the Buffalo Flexible Income Fund this year. Name Eli Lilly & Co. LLY,
as an example. The stock has risen 8.5% this year and the dividend yield, based on the cost of the fund, is about 11%, Kornitzer said. It has cut the position to become about 3% of the fund’s portfolio.
Eli Lilly recently increased its dividend by 15% in December.
He likes to keep insurance companies in the long run, for continuous dividend increases. An example is Arthur J. Gallagher & Co. AJG,
which increased its dividend by 6% in January. Another is Allstate Corp. ALL,
which increased its payment by 5% in February.
“So far this year, 70% of our companies have raised dividends,” Kornitzer said.
Asked about stock market opportunities after a sharp drop in prices, Kornitzer suggested a long-term thought: “Any company that supports robotics will have a bright future,” he said. “Visit any large industrial plant today and apply robots if they can not hire anyone. “They are not firing anyone.”
An example in this area, where “start building positions” is ABB Ltd. ABB,
which has a dividend yield of 2.61% and has fallen 28% this year within the “range” of Kornitzer.
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