David Kass’ Picks Often Outperform the Market. Here Are His Latest Picks.
SMITH BRAIN TRUST – If you follow David Kass’ stocks to watch, it’s time to update your holdings.
Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, is holding onto some longtime favorites (Berkshire Hathaway, Apple and Microsoft), adding an older pick (Amazon) back into the lineup, and adding six new equities into the mix.
“As a result of the once-in-a-century event – the COVID-19 pandemic and its associated lockdowns – several sectors of the economy performed poorly during the first half of 2020,” Kass says. Transportation, energy and finance were hit particularly hard.
Four of the 10 stocks Kass recommended for 2020 were directly impacted – Occidental Petroleum, Berkshire Hathaway, Bank of America, and JP Morgan Chase. Overall, the portfolio returned -15.5% (without dividends) over the first six months of the year, compared to the Dow Jones Industrial Average’s return of -9.9% and S&P 500’s -4.7%. The best performers in Kass’ portfolio were Microsoft +29.1% and Apple + 24.2%.
For the second half of 2020, Kass is recommending a 10-stock portfolio.
Its success, as well as the success of the overall stock market, he notes, will depend on the path of COVID-19, future government support measures from the Federal Reserve, Congress and U.S. Treasury, and the outcome of the November election.
Here are Kass’ 10 midyear stocks to watch:
Berkshire Hathaway: The multinational conglomerate helmed by CEO Warren Buffett has consistently been ranked on Kass’ list of stock picks. Its shares are off its low, but still down 16.9% on the year. Nonetheless Kass, who has studied Warren’s investments and philosophy for more than 35 years, is optimistic about the stock’s prospects.
Apple: Apple also remains in the Kass’ stocks to watch portfolio. It continues to innovate and is a “cash flow machine,” Kass says, noting that Berkshire maintains a $90 billion stake in the tech giant.
Microsoft: Shares of the technology company have outperformed amid the coronavirus crisis, helped by the strength of its cloud computing business. With companies working remotely, there’s never been a more important moment for the cloud.
Amazon.com: The ecommerce behemoth, recommended in June 2019, then dropped for 2020, returns to Kass’ lineup. Amazon’s shares have hit a succession of new all-time highs since the pandemic began. Not only is Amazon dominant in e-commerce, and not only was it able to greatly expand its footprint in grocery deliveries with much of the world under stay-at-home orders, but Amazon also has benefited from a surge in demand for its massive cloud-computing unit. Berkshire Hathaway, Kass notes, has a significant stake in Amazon.
Facebook: The social media giant whose stock has recently been battered as some 400 brands launch a boycott over its failure to adequately address hate speech is a newcomer to Kass’ stocks list. The professor notes that the social giant, despite the boycott, nonetheless generates a lot of cash flow and requires little capital to run.
Costco: Retailers don’t often make the watch list, but Costco is an exception, Kass says. The members-only warehouse chain is well managed and has steady growth, even without those iconic half-sheet cakes. Berkshire holds a stake in the buy-in-bulk mainstay, and Berkshire vice chairman Charlie Munger sits on its board of directors.
Charter Communications: The cable and broadband company has seen a boom in business amid lockdown orders, as at-home customers dramatically increase their TV viewing, streaming and computing. The company has hired thousands of additional billing and sales agents, using virtual job interviews to get the job done. That’s good management, Kass says. Berkshire owns a stake.
Micron Technology: The Idaho-based memory chip maker reported higher-than-expected revenue in its recent earnings report and delivered upbeat guidance, as stay-at-home workers and students boost demand for its computer and data center chips. The company is an excellent growth opportunity, says Kass, with work-from-home and study-from-home likely with us for some time.
RH: The 83 brick-and-mortar locations of the luxury-furnishing retailer formerly known as Restoration Hardware aren’t even open, but that doesn’t matter to Kass right now. Consumers are spending way more time at home, and those who can afford to are looking to spruce things up. RH is the right brand for affluent spenders who are part of the ongoing de-urbanization trend, says Kass. Berkshire owns 9% of the brand.
Cable One: Like Charter Communications, Cable One has seen a surge in broadband business because of the pandemic’s work-at-home mandates. Plus the company, a 2015 spinoff of Graham Holdings, has a high rate of free cash flow, high return on equity and high operating margins.
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