Fund Manager John Buckingham: Five Stock Picks

John Buckingham may not be a perma-bull, but he’s seldom bearish for long, and he’s certainly not going to let a little acrimony in Washington put a dent in his cheery outlook for the stock market. Buckingham, manager of the Al Frank Fund and chief investment officer at Al Frank Asset Management, finds valuations and prospects for corporate earnings and economic growth sufficiently promising to remain committed to stocks.

What adds to his optimism is that so few investors seem to share it. In an interview with YCharts, he highlighted the persistent skepticism, if not outright despair, revealed throughout the year in surveys of individual investors and investment newsletter writers. He also pointed to the flows out of equity funds that have been observed month after month since the stock market peaked five years ago.

Buckingham has developed a small worry in recent days, however, that more people are starting to agree with him, seeing tiny signs of a turn in investor sentiment. Investors seem to be looking past, rather than dwelling on, talks in Washington to avoid a fiscal cliff. "People are betting that we’ll get a solution,” Buckingham says.

As for his own bets, he is not taking money off the table, although he acknowledges focusing more on conservative stocks. In addition to a customary emphasis on low valuations, Buckingham is looking for healthy dividend yields to cushion any falls. Here are five of his current picks.

Apache (APA): This oil and gas exploration company “is an undervalued name in a sector we really like,” he said. The stock is trading at about $77, close to a 52-week low and well below its high of $112.09. Earnings per share in the last 12 months were a tepid $6.28, but Buckingham is looking for a recovery to about $10, which would leave the stock trading at a PE ratio of less than 8. As shown in this chart of the operating price earnings ratio – the stock price paid for each dollar of pretax operating earnings – Apache is cheaper than such rivals as Devon Energy (DVN) and Anadarko (APC).

APA PE Ratio TTM Chart

APA PE Ratio TTM data by YCharts

Hasbro (HAS): A “good, old toy company” and “a quality name,” could get even better if speculation that Disney (DIS) might make a takeover offer proves true, Buckingham said. Hasbro makes “Star Wars” toys, and with Disney suddenly owning the film franchise with its acquisition of George Lucas’s Lucasfilm production company, Hasbro’s and Disney’s operations would seem to fit together nicely. Either way, the promise of a new cycle of “Star Wars” movies should provoke “a renaissance in the brand,” Buckingham said. Meanwhile, Hasbro trades at roughly a market multiple and with an above-average 3.9% dividend yield. It also has a ratio of price to sales that’s far cheaper than that of its archrival Mattel (MAT).

HAS Price / Sales Ratio TTM Chart

HAS Price / Sales Ratio TTM data by YCharts

KLA-Tencor (KLAC): As a maker of semiconductor equipment, KLA is particularly dependent on a healthy economy. But even in the economy we’ve got, with corporate capital spending subdued, the company is making enough money to trade at a modest PE ratio of 11.5. It also has $16 a share of cash on its books, or about one-third of its market capitalization, a figure that has risen steadily for four years.

KLAC Cash and ST Investments  Chart

KLAC Cash and ST Investments data by YCharts

If you strip out the cash and consider only the active business, KLA trades at less than 8 times earnings, Buckingham pointed out. “They’ve got some innovative technology,” he said, “and they’re still making a lot of money, even with the [capital spending] cycle at a lower point.”

SEE PART TWO FOR PICKS 4 and 5.

Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at editor@ycharts.com.

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