With Annell Danczyk and Brian Lazorishak, Senior Portfolio Managers at Stack Financial Management
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.
Click here for Part I