“We are bargain hunters at our core – in the stock market and the supermarket. That means we don’t believe in paying more than something is worth, no matter how fancy the packaging.” -John Buckingham
John Buckingham (Trades, Portfolio) has been a successful bargain hunter, both through the recommendations he makes in a newsletter called The Prudent Speculator and through the stocks he has picked for the mutual and private funds handled by his firm.
He is a value investor who relies on three core tenets: stock selection, diversification and patience.
For investors who put their money into his flagship fund, The Al Frank Fund, since 2013, patience will have been essential. After an outstanding 2013, the fund underperformed in 2014 and 2015 before getting back on track in 2016.
Who is Buckingham?
Buckingham reports a Horatio Alger-type career in a biography posted at Forbes magazine. After graduating from the University of Southern California with a bachelor's degree in computer science (and a minor in business administration), he says he worked his way up from "the proverbial mail room in 1987 to Director of Research in 1989 to Chief Portfolio Manager in 1989." The firm that fast-tracked him was Al Frank Asset Management (before changing its name to AFAM Capital Management).
He says he now leads a team that searches for value stocks on behalf of money management clients, shareholders in the firm’s mutual funds and subscribers to The Prudent Speculator investment newsletter.
Buckingham is also editor of that newsletter and a contributor to Forbes magazine. Television, radio and print media often interview him for his thoughts on the economy, the market and individual stocks.
Having the right kind of university degree no doubt helps, but Buckingham must have shown a strong aptitude and outstanding intelligence to have worked his way up the ranks so quickly.
What is AFAM Capital Management?
Based in Austin, Texas and with a second office in Aliso Viejo, California, AFAM (previously Al Frank Asset Management) provides personalized asset management services to individuals, according to its website.
The firm was founded by Al Frank, who started publishing an investing newsletter, The Pinchpenny Speculator (later known as The Prudent Speculator), in 1977. The newsletter was a success, bringing in both paying subscribers and individuals who wanted Frank to manage their portfolios. Today, the $295 a year newsletter is marketed as a do-it-yourself investing guide, and the firm uses it as a channel for client acquisition.
Whatever the source, clients have been coming in to AFAM money management services; its total assets under management as of June 30 were $712.2 million according to its latest Form ADV.
In addition to researching, writing and publishing its newsletter, AFAM offers three types of ETFs and mutual funds to its private clients:
From the Al Frank group, four value equity strategies:
- Al Frank Select Value (VALUX), All Cap Value.
- Al Frank Select Dividend, All Cap Value.
- Al Frank Select SMid Dividend, Small- and Mid-Capitalization Value.
- Al Frank Select Focused Dividend, All Cap Value.
Innealta Capital, a division of AFAM Capital, provides four ETFs:
- Country Rotation.
- Sector Rotation.
- Global All Asset.
- Fixed Income.
Also from AFAM, three blended portfolios under the Dynamic brand:
- Dynamic Portfolio Series Growth.
- Dynamic Portfolio Series Moderate.
- Dynamic Portfolio Series Conservative.
The Prudential Speculator has been praised by The Hulbert Financial Digest; in a May 2017 article for Barron’s, Mark Hulbert ranked The Prudent Speculator newsletter number one and called it “one of this country’s most successful investment newsletters of the past four decades.”
An investment newsletter that is forced to walk the talk because it is intertwined with management of numerous mutual funds and ETFs. And for the newsletter’s editor (Buckingham), it offers an opportunity to test drive investing ideas in the real world.
Buckingham’s investment strategy
The guru and Al Frank Asset Management have built their newsletter and funds with a philosophy that has three core tenets:
- Free-to-go stock selection.
- Diversification.
- Patience.
During the selection process, Buckingham says they assess investment candidates by their relative valuation metrics and their assessments of stock-specific risk. While they may invest in specific geographic areas or market capitalizations, they only buy stocks that are undervalued under one or more criteria, including:
- Their own trading history.
- The history of their peers.
- A specific universe, or the market in general.
He adds they buy based on prices that reflect a range of potential risks.
Turning to diversification, Buckingham says, “We don’t rely nearly as much on 'how many' as we do 'in which.'” He also speaks of "expansive diversification" that helps reduce the risk of specific stocks, while at the same time increasing the probability of finding appreciating investments. Responding to the rhetorical question “how many stocks?” he says, “More like 50 and up. We like stocks. And we like a lot of ‘em.”
On the third tenet, patience, he says they favor long-term investing. They buy securities that are undervalued because they are out of favor, and then hold them until they become fairly valued. Buckingham notes prices rarely go directly from undervalued to fairly valued, and it takes "a special dose of patience" to stay in the security as it bounces up and down on its way to higher (they hope) value.
In the July 3 edition of The Prudent Speculator, Buckingham lists 10 stocks worthy of consideration (a list he creates each month). All stocks must meet three essential criteria: fit within a broad diversification theme, be undervalued and have potential for long-term appreciation. These are the first five:
- Apple Inc. (AAPL, Financial): Buckingham disagrees with those who think Apple is doing too much, and he notes that "it seems strange that Apple's foundation of $250 billion in cash and 14.5 times price-to-forward-earnings ratio would be called anything other than attractive."
- BB&T Corp. (BBT, Financial): He says this financial stock passed its Federal Reserve Stress Test, which included a capital plan providing for a 10% dividend increase and almost $1.9 billion in share buybacks. While shares popped up after the Stress Test results, they are still down on the year. Buckingham expects lighter regulations combined with interest rate increases to give the bank "room to run."
- Goldman Sachs Group (GS, Financial): It, too, passed the Federal Reserve Stress Test, and Buckingham says it has a "best-in-class franchise with premier marketing positioning across numerous business lines."
- Goodyear Tire & Rubber Co. (GT, Financial): Buckingham says the stock price dipped because it expects reduced revenue due to slower daily rental sales. However, he says Goodyear sells in two distinct markets: replacement and vehicle manufacturers. Therefore, Goodyear should be more sensitive to overall miles than to new sales. With strong employment, rising wages and lower fuel prices, consumers should be traveling more (more miles).
- Intel Corp. (INTC, Financial): The internet of things should drive "tremendous" growth. He says he likes the diverse revenue streams, low levels of debt and the increased 3.2% dividend yield.
The picks for the July issue of The Prudent Speculator back up the philosophy of selecting from a broad universe, but buying only those securities or stocks that are currently undervalued, have earnings potential for patient investors and help diversify the portfolio.
Current holdings
This GuruFocus chart shows ETFs and technology hold the biggest portions of AFAM Capital's portfolio:
This table from the Al Frank Fund fact sheet shows the top 10 holdings for this fund specifically:
Thanks to the Innealta division, the firm has a heavy ETF presence. As we have seen above, Buckingham and associates also like Apple, a tech stock, and Corning (GLW, Financial), also a tech stock.
Buckingham’s performance
This GuruFocus table shows the performance of the Al Frank Fund compared with the S&P 500 over the past decade:
This table shows performance before 2007:
This Morningstar chart shows how the Al Frank Fund has lagged the S&P 500:
Buckingham got off to a sterling start, with a return of over 60% in the first year and 78% in 2003. Since 2006, he has been less successful at staying ahead of the S&P 500, although he has generally kept up with the large value category average. Like many other value investors, it seems he has trouble keeping up in a bullish market.
Conclusion
Buckingham and The Al Frank Fund have had some outstanding years, including 2016 when he beat the S&P 500 by more than three and a half points. Also, who could fail to notice 60% and 78% returns in 1999 and 2003?
But investors who buy into the fund should bring their patience along. As we have seen, the fund has also had its underperforming years, including a loss of more than 6% in 2015.
Prospective investors in the fund should follow Buckingham’s advice: be patient. Buy when the fund dips and becomes relatively inexpensive, then hold until it becomes relatively overvalued or you have a better prospect ready to go.
Disclosure: I do not own shares in any of the stocks named in this article, and I do not expect to buy any in the next 72 hours.
