John Kornitzer, one of the very hottest mutual fund co-managers, expects a rocky stock market in 2023.
"Since it's not an election year, the government doesn't care," said Kornitzer, co-manager of $503.9 million Buffalo Flexible Income Fund (BUFBX), which is outperforming 98% of its large-cap value peers this year tracked by Morningstar Direct, going into Wednesday. "The government wants the market up in election years. So I think we're in for a little volatility next year, based on what's going to happen with labor, wages and energy."
Energy is one wild card threatening the stock market in 2023, in Kornitzer's eyes. "Energy prices could spike or maybe come down. If they spike, it adds to the problem of (potential) recession. If they stay up, we could see lots of defaults and bankruptcies. It's a tightrope."
Stock Market Risks In 2023
Labor and wages are additional risks for the stock market in 2023, he says. Organized workers at Starbucks, Amazon and Chipotle staged walkouts this past year, Kornitzer says. The problem is twofold. Rising wages fuel inflation. In turn, that prompts the Federal Reserve to raise interest rates, which dampens the economy. And that plays out as weakness in the stock market, Kornitzer says.
Still, Kornitzer's job is to find opportunities in the stock market. "So I look for companies that benefit from high rates," he said. "Insurers love high interest rates. As rates increase, insurers turn over their holdings for bonds with higher yields."
One insurance-related company he likes is insurance brokerage Arthur J. Gallagher. "We own it at (an average cost of) 35 per share," Kornitzer said. "They keep increasing their dividend. And earnings keep going up."
In addition, the insurance industry has pricing power, Kornitzer says. "And Gallagher is a broker. So they make money no matter what, without risk."
Underwriters, not brokers, pay off on claims.
Further, Flexible Income writes covered calls against Gallagher stock. That means other investors pay a premium to Flexible Income for the rights to potential appreciation of shares beyond an agreed-to price. Those premiums provide the fund with income, enhancing yield.
Rising Interest Rates
Banks also benefit from rising interest rates. That makes them another place to look for 2023 stock market winners, Kornitzer says.
Flexible Income likes Citizens Financial Group and Truist Financial. Both are regional banks. "Citizens is one of the oldest banks in America," Kornitzer said. "It's a good, solid bank. They recently increased their dividend. And it's cheap. They're selling at nine times earnings. Their margins are going to widen because their loans are good and their reserves are good."
Man Of Steel
Kornitzer also sees stock market potential in miner Rio Tinto, especially in a post-recession world. "BHP Group (another holding) and Rio are two big makers of iron ore, besides copper and other minerals," Kornitzer said. "You can't have economic growth without steel. And you can't have steel without iron ore. The U.S. and China are big users. Europe uses some. Now that half of Ukraine has been destroyed, they will need a lot of steel to rebuild it. In the U.S., infrastructure build out needs steel. BHP and Rio are an oligopoly. And they're great dividend payers."
Still, Kornitzer says he has limited the size of his Rio stake because of the cyclicality of the business.
Energizing The Stock Market
Despite share-price run-ups, many energy names still have room to notch stock market gains, Kornitzer says.
The fund had 28% of shareholder money in energy sector stocks as of Sept. 30. To tame his exposure to individual names, he has "sold a lot of energy this year," he said.
Exxon Mobil shares are up 92% this year. Trading around 114, its yield is 3.2%. Flexible Income's average cost is about 69.
"Exxon's got a major field in Suriname off the coast of South America along with Hess," Kornitzer said. "Production in that field is going to keep rising for the next three, four, five years. They keep hitting more new wells."
Kornitzer says the fund will decide around January or February whether to trim Exxon Mobil. The decision will be based on energy prices through this winter in Europe. It will also rest on political issues such as whether the energy sector elicits a heavy regulatory burden, Kornitzer says. It will also depend on how much if any dividend increase the company announces early in 2023.
2022's Stock Market Storm
Rare among mutual funds this year, Buffalo Flexible Income Fund has been a shelter from 2022's market storm.
The fund was up 5.71% this year going into Wednesday vs. the S&P 500's 15.08% setback. The fund's large-cap value direct rivals averaged a 4.32% loss.
Equally valuable, over the three years ended Oct. 31 Buffalo Flexible Income lost just 77% as much as the S&P 500 in any decline on average. Yet it gained 85% of the popular index's advances. "I'm not a go-go-go stocks kind of guy," Kornitzer said. "I don't have 'em. I don't want 'em. What I am is a solid, conservative investor. I'll protect your money."
Retirees Seeking Income
Basically, this fund is for shareholders willing to sacrifice a little upside potential over the long run for the sake of less volatility.
In part, the fund aims for that trade off by focusing on stocks able to generate income. Income generators tend to be stocks that are more financially stable than many other stocks. Many of those stocks have held up better than the market overall amid this year's market miasma.
The fund's trailing 12-month yield is 1.54% vs 1.6% by SPDR S&P 500 ETF, which tracks the big-cap bogey. "This fund is good for retirees who want stability and income," Kornitzer said.
The fund has outperformed 88% of its Morningstar peer group over the past three years. And it has outshined 68% over the past five years.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best mutual funds.
