Three Stocks Bucking The Downtrend

It’s been a rough year for the stock market so far. Here are three stocks that are bucking the downtrend and that also are relatively inexpensive, selling for 15 times earnings or less.

These stocks have managed to rise even as the Standard & Poor’s 500 Total Return Index fell 5.4% this year through February 4.

Many people consider Warren Buffett the preeminent investing genius of our times. For about $315 a share, you can own a little piece of his company, Berkshire Hathaway Inc. (BRK.B).

Berkshire’s stock is up more than 4% this year. Last year, it rose 28.95%, a fraction more than the soaring S&P 500. Since the beginning of this century it’s up more than 760%, versus 367% for the index.

Berkshire Hathaway owns major stakes in such companies as Coca-Cola and Procter & Gamble, and owns about 100 companies outright. Company managements are given lots of autonomy, so long as they continue to produce good results.

It’s been a winning method for years, but skeptics say that Berkshire has become too big to grow fast. What’s more, Buffett is 91 and his sidekick Charlie Munger is 98. How long can they work their magic? I think that Buffett’s designated successor, Greg Abel, will do well. He is currently in charge of Berkshire’s operations other than its insurance companies.

Of the stocks that managed gains in the first five weeks of this year, many were banks. The reason is logical. Interest rates have been rising, and the Federal Reserve has declared its intention to let them rise further. To understand why this is good for banks, consider an old humorous summary of how banking works: “Borrow at 2, lend at 3, and hit the golf course by 4.”

Suppose you’re a bank. If you borrow $100,000 at 2% and lend the same amount at 3%, you will make about $1,000 a year before expenses. But if you borrow at 4% and lend at 6%, you make $2,000, or twice as much. Generally, therefore, rising interest rates are good for banks.

One bank that interests me at the moment is First National Bank Alaska (FBAK), whose stock is up about 8% this year through February 4. The company has no debt. The stock seems reasonably priced to me at 14 times earnings and 1.4 times book value (corporate net worth per share).

Over the past decade, this bank has increased is earnings about 5% a year, and increased its dividends about 8% a year. The dividend yield is about 5%. And—though I hope I’m wrong—global warming may lead to a big increase in Alaska’s population over the next two decades.

Loews (L) has been a terrible laggard. It is up 58% in the past decade, while the S&P 500 is up 308%.

This is a conglomerate run by the Tisch family. The main units are CNA Financial (about 89% owned) and Diamond Offshore Drilling (53% owned). In addition the company owns outright Boardwalk Pipeline Partners LP and Loews hotels.

Hotels have, of course, been ravaged by the pandemic. Diamond Offshore was in Chapter 11 bankruptcy from April 2020 until April 2021. But the energy industry is making a comeback, which is one reason why Loews shares are up about 5% this year.

In an expensive market, Loews is cheap, selling for 10 times earnings and 0.87 times book value. The stock’s Pietroski F-Score (intended as a measure of timeliness) is eight out of a possible nine.

The Record

This is the 40^th column I’ve written, beginning in 2000, about stocks that possess both value and momentum. My selections from a year ago have returned 27.6%, a few points better than the 21.0% return on the S&P 500, including dividends. The best gainer was Met Life (MET), up 47% including dividends.

First Citizens Bancshares (FCNCA) scored 29% and Eagle Materials (EXP) 24%. Lagging the index was Tri Pointe Homes (TPH), up 11%.

One-year returns can be calculated for 38 columns in this series. The average one-year return has been 13.5%, versus 10.6% for the S&P. Of the 38 columns, 28 have been profitable and 20 have beaten the index. Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: I own Berkshire Hathaway shares personally and for almost all of my clients. A hedge fund I manage owns call options on Met Life.