Is Your Portfolio in Need of Repair? Some Insights into our Plan for Recovery

Is your portfolio in need of repair? We discuss our plan to reposition in this week's Jarvis Update. I'm your host, Brian Dress, joined by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Hi, Brian. We got the NBA draft tonight, so let's call it Draft Thursday.

Before we get started, just a quick preview on what we're going to cover this week. We'll be covering 3 stocks we think are poised to perform in a challenging market environment. That'll be Kraft Heinz, Best Buy, and IBM. The theme, uh, and the thread between all of them is that cash flow is king and dividend yields are what we're looking for at this time. So contact us directly to learn more about these stocks and other stocks we think fit the bill at the number in the email that I'm going to put in the description below. So go ahead and contact us and we'll have a conversation with that. A couple of announcements. We've got our subscription service, Left Brain Investment Research. We've got that Best Buy report hot off the press from our analyst Madhu Choudhury. We've got two new reports coming out this week as well. We also have The Chosen. That's our favorite stock and income security idea for the month. And if you want to join, if you're a new subscriber, we're going to have a promo code for you. Jarvis59, look for that down in the description as well. That'll be $59 a month for your first 3 months. So check that out. And then we also have the Jarvis newsletter. So with that, we'll jump into the market recap quickly. So indexes were all down this week. S&P about 1.3%, NASDAQ about 1.5%, and then the Russell brought up the rear at 2.8%. It was definitely an improvement over Wednesday where the S&P and the NASDAQ were down 4% and 5%. The AAII Sentiment Survey was the most bearish since 2009. That was 59% bears, 24% neutral, and 16% bullish. So sentiment is awful out there. We had a handful of 52-week highs, but many more 52-week lows. The highs were energy, shipping, and REITs, and the lows were in preferreds, munis, financials, and tech, just to name a few. And then we had a barrage of earnings, some positive Meta, Facebook. We had Microsoft, MSFT, Chipotle, CMG, and ServiceNow, NOW. And then on the negative side, we had General Electric, GE. We had Alphabet, Google, GOOG, Boeing, BA, and Amazon, AMZN. So Nolan, what are your general thoughts on the market action and the earnings that we saw this week?

You forgot about the huge blowup in TDOC. That was one that we forgot to leave out. No, I don't think we're going to talk about that one. No, Earnings Week is our favorite time of the year. We get 4 of these per year, and we really look forward to parsing what these CEOs say. You know, it's one thing to hear, you know, what CNBC or The Wall Street Journal says, but when you hear directly from the man or the woman himself or herself that's manning the ship, We really pay attention to business conditions on the ground in real time. So we're right in the thick of earnings. And what we make of it is it's still consistently inconsistent. You know, sometimes you'll have a really good idea of what a company will report because they'll telegraph it early, and then the stock reaction surprises you. My takeaway from earnings season is still more of what we've seen so far this year. The economic environment tends to be really uncertain at this time, and there's a lot of crosscurrents that investors and companies have to navigate. We know them all: interest rates, economic conditions, inflation, supply chain issues. And how well these companies are positioned to a large extent determines how well they report and what they'll do the rest of the year. So interested to see how the rest of the companies will do and as we move along in earnings season.

Now we're going to just jump right in. We got 3 stocks we want to discuss, we think have portfolio repair potential. Whether you're holding stocks or bonds this year, you're probably down. So you're probably looking for a way to get some give back. And so Nolan, we're active managers. Talk a little bit about why we are active managers and the advantages there are to that in this kind of environment. And then also what characteristics are you looking for in these sort of repair stocks?

So like everybody, we're looking to catch up. Question is, how quickly can we catch up? And there's a few strategies or tools that investors can use to do it. Underlying any security that we would think about going into, uh, we really think about business fundamentals and particularly acceleration in those fundamentals. And so we're looking for things like accelerated revenue growth, accelerated increasing in cash flow, and then analyst earnings expectations increasing. And, uh, the thing that's different— a couple years ago, a lot of those, um, characteristics were found in the tech world or the high-growth consumer discretionary world. And today we're still looking for those same characteristics. That hasn't changed. What has changed is the number of companies that pop up that exhibit these characteristics. And so, uh, that's what we're looking for.

So topic 1, it's our first stock, it's Kraft Heinz. These 3 stocks are going to be from different walks of life, uh, so to speak. Kraft Heinz, we'll throw a chart up for you year to date. This is KHC. This is the purveyor of such brands as Velveeta, Oscar Mayer, Kool-Aid, and Jell-O. And then of course, uh, Kraft mac and cheese and Heinz ketchup. This stock's up 20% year to date, which is pretty impressive given how the rest of the markets performed. It's got a 3.7% dividend yield. We saw earnings this week. They were fairly strong. Organic net revenue growth was in the 6% range, and that was basically because they were able to raise their prices. And we've seen this company's had over $4 billion in free cash flow each of the last 2 years. That's a 15% or better yield of free cash flow to sales, and there's pricing power. So Nolan, how does Kraft Heinz kind of fit into what we're looking for?

I think it's the perfect type of stock that may continue to work in this uncertain economic environment. And depending on what you're looking at, you know, a lot of people theorize maybe these interest rate increases may lead to a slowdown in economic activity. And so these predictable businesses, uh, with stable business model, with pricing power that could pass through these inflation costs, I think it's the profile of the business that'll work. You mentioned the free cash flow, and part of what they use that free cash flow for is rewarding shareholders and dividend payouts. So I like it. It's also a rebound stock. You know, you can go back 5 years or so and those shares are half of what they were at that time. So you could get multiple expansion, and that's a way for those shares to exhibit price strength as well. So it's a name that we like.

Yeah, definitely looks interesting here on this 5-year chart we've got up for you here. And, um, you know, of course pricing power is so huge right now, inflation being really one of the main themes of the year. The ability for a company to raise its prices as its supplies prices go higher is really crucial. And again, free cash flow and dividend yield are a couple of things we're looking for in a lot of these stocks. So with that, we'll move on to the second stock. So topic 2 is Best Buy, that's BBY. We're coming from another angle on the consumer, consumer side, but this is more consumer discretionary. Whereas Kraft Heinz was consumer staples. So we see opportunity in both sides of the consumer. We, again, we have a brand new report from our analyst Madhu Chaudhry on Best Buy that came out last week. So definitely take advantage of the offer, the $59 a month for 3 months on the Left Brain Investment Research service. If you want to take a look at that report, he was bullish on the name and we are too. We like Best Buy for a few reasons. It's got a low valuation. Its PE price-to-earnings ratio is under 10. What I like to call a first-floor window stock. If you fall out of a first-floor window, it's not going to hurt too badly. It's also got a 3.8% dividend yield, and the business is improving. You know, these companies were— companies like Best Buy were definitely under siege from Amazon and other online retailers over the last few years, but they're catching up with their omnichannel strategy, you know, growing sales both in-store and online. and also a new subscription initiative is bringing some more predictable revenue to the business. So with that all in mind, Nolan, tell us a little bit about what you're thinking on Best Buy.

You know, what's old is new. Just thinking about this rotation we've witnessed from growth to value, and I'm not sure which category you'd put Best Buy in. It's a name that we are very familiar with. We had a lot of exposure to the stock going back you know, a decade or so ago, and it was kind of left for dead. You mentioned the showrooming that happened where people would walk into a Best Buy, look and see what their prices were, whip out their phone and order it on Amazon. And Best Buy got smart. They fought back. They do price matching now, and, uh, basically they have all of these shops within a shop. So you can go in there and look at computers or any consumer device, appliances, what have you. And so they reached out to the brands, and these brands have set up their own shops within a Best Buy. What really interests me is their service business. So, it isn't just their one-off sales where they make margin. They have the service business, you know, an expanded Geek Squad. They're smart. They're shrinking their store footprint, which means the existing stores get more traffic. Profits are up. It is a grower, double digits on earnings, a lot of free cash flow. They're buying back stock and they pay a dividend.

I want to dig in a little bit more on the dividend yield of it, and we can speak more generally than just Best Buy. When you see a company that has a yield of 3.8%, can you speak to investors on kind of the, the floor that puts into the stock and, and how you— it makes you look at a stock relative to a stock that has no dividend yield?

If you receive a dividend, you can actually look at the capital gains— that's the stock price going up— as icing on the cake. You know, a lot of people will hold the stock and not even look at the share price as long as they're getting those dividends and they're creating their increase every year, then you tend to view the shares differently. And I think, Brian, in this environment, what a lot of investors may be doing, you know, the traditional place to get income or yield is through bonds. And because we're in this rate-rising cycle, that's not such an attractive place. Rates are low and capital appreciation are turning into capital losses. And so a lot of cases, you know, these stocks pay a much higher dividend yield than what you you can get from bonds, but they also increase every year and you have a chance for capital appreciation.

Best Buy, it's kind of best of both worlds. There's growth there and we also have some income. So it's something for everybody. And that's why we like this one. Topic 3 is IBM. You want to talk about left for dead stocks, this is definitely one of them. Over the last 10 years, this has not performed by any means, but it's starting to hold up. It's flat on the year, which is pretty impressive when you compare it to other technology businesses. It's got faster growth according to its earnings report last week, better margins. It's got nearly 5% yield on the dividend side and a price-to-earnings of about 21. So not out of control. That's pretty much a market multiple and you have some growth. And then finally, it's got a really strong manager and CEO, Arvind Krishna, So a lot to like here on IBM. I know this is one that a lot of investors have forgotten about for more than a decade.

It did pop up on our radar screen. We followed it for a while. It was a yawner, wasn't much to talk about. But a couple of years ago, they did do some M&A. They bought Red Hat, which is an open-source software business. And so they're sort of transforming the portfolio at IBM away from mainframes into the real world. Which I think is really important. So it's interesting. They had 8% revenue growth in the quarter. It is one to watch. The stock shares aren't necessarily cheap at a 21 times earnings, but if those earnings can start accelerating, then the PE ratio looks a lot more interesting. The 5% dividend is attractive. They've not cut that dividend. They've raised it. And you could say from a capital allocation standpoint, that's been a mistake, but I think The IBM shares are interesting. They have a profile of a business in an uncertain economic environment that dividend should really cause the share price not to move around so much. You can kind of anchors the price. I think IBM shares are interesting.

Okay, Nolan. Well, we've got 3 names we talked about here, Kraft Heinz, KHC, Best Buy, BBY, IBM. Can you tie it all together for us? What is the profile we're looking for in this portfolio repair strategy? And, uh, you know, tell listeners what they can expect if they give us a call and, uh, you know, ask to hear about some more of the names in the portfolio.

Yeah, so we're looking for the twin engines here to really drive investment performance. And the twin engines— one is we need accelerating fundamentals, we need businesses that are getting better, and we also need the ability for whatever price we pay today, for that price to go up. I mean, multiple expansion. So if we're buying something at 10 times earnings and earnings go to 20 times earnings, the stock can double even if earnings don't. And so we're looking for both of those. We're also looking for predictability. We're looking for businesses where the revenues are pretty predictable. Uh, that really helps put a floor under things in such an uncertain economic environment. The bottom line is we're looking for invest— investments that we think can go up over the next year or two.

All right, Nolan, we'll, we'll ask everyone, if you want to get in touch with us, we'll put all the contact details below. Again, if you enjoyed the content, please like and share the video with your network. It helps others find it. Put a comment below, be happy to engage with you. And also make sure you take advantage of that $59 for the first 3 months for new subscribers on the Left Brain Investment Research. With that, Nolan, I'm looking forward to the NFL Draft. My Chiefs have all your Dolphins picks, so I don't know what you're going to do. Maybe watch Tyreek Hill highlights all night.

Yeah, oh boy, oh boy, you're right. But this This is an exciting time for the— of the year for all sports, but especially us NFL fans. We have the draft, we've got earnings season, and we also have the NBA playoffs. We have a trifecta, so there's a lot to like.

All right, thanks. We will see you again next week.