John Kornitzer, one of the hottest mutual fund co-managers, expects a rocky stock market in 2023.
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“The government doesn’t care because it’s not an election year,” said Kornitzer, managing director of the $503.9 million Buffalo Variable Income Fund (BUFBX), which has outperformed 98% of its large-cap peers tracked by Morningstar this year. Live, entering Wednesday. “The government wants the market to increase in election years. So I think we’re going to be in for a little bit of volatility next year depending on what happens with labor, wages and labor.”
In Kornitzer’s eyes, energy is one wild card threatening the stock market in 2023. “Energy prices can go up or down. If they go up, it adds to the (potential) problem of a recession. If they stay, we could see more defaults and bankruptcies. It’s a tightrope.”
Stock market risks in 2023
Labor and wages are additional risks to the stock market in 2023, he said. Organized labor in Starbucks (SBUX), Amazon (AMZN) and Chipotle (CMG) has made strides this past year, Kornitzer says. The problem is twofold. Wage Increases Inflation. In turn, that prompts the Federal Reserve to raise interest rates, which weakens the economy. And that plays out as a weakness in the stock market, says Kornitzer.
Still, Kornitzer’s job is to find opportunities in the stock market. “So I look for companies that benefit from higher prices,” he said. “Insurers love high interest rates. As rates go up, insurers will submit to higher-yielding bonds.”
One favorite insurance-related company is an insurance broker. Arthur J. Gallagher (AJG) Kornitzer said, “We’re at (average cost) 35 per share.” “They keep increasing their dividends. And their earnings keep going up.”
In addition, Kornitzer says, the insurance industry has pricing power. “And Gallagher’s a broker. So no matter what, you’ll make money without risk.”
It is the underwriters, not the broker, who pays the claim.
Additionally, Variable Income writes covered calls on Gallagher stock. This means that other investors pay for the rights to appreciate the shares above the agreed price in return for variable income. Those premiums provide the money with revenue, which boosts production.
Rising interest rates
Banks will benefit from increasing interest rates. That makes 2023 stock market winners another place to look, says Kornitzer.
Variable income likes Citizens Finance Group (CFG) and Financial truth (TFC) are both regional banks. “Citizens is one of the oldest banks in America,” Kornitzer said. “It’s a good, strong bank. They recently increased their dividend. And it’s cheap. They sell at nine times earnings. Their margins are going to expand because their loans are good and their reserves are good.”
iron man
Kornitzer sees the potential of the stock market in mining Rio Tinto (RIO), especially in the post-post-economic world. “BHP Group (BHP) (another holding) and Rio are two big iron ore producers, apart from copper and other minerals,” Kornitzer said. And you can’t have iron without iron ore. The US and China are big users. Europe uses some. Now half of Ukraine is destroyed, again. They need a lot of steel to build. Infrastructure in the US needs steel. BHP and Rio are an oligopoly. And they are a great distributor.
Still, Kornitzer said he limited his stake in Rio because of the business cycle.
Stimulating the stock market.
Despite the stock price rally, many energy names still have room to post stock market gains, Kornitzer says.
The fund had a 28% stake in energy sector stocks as of September 30.
Exxon Mobil ( XOM ) shares are up 92% this year. Trading around 114, the yield is 3.2 percent. The average price of variable income is around 69.
“Exxon has a large field in Suriname off the coast of South America. Hess (HES),” Kornitzer said. “Production in that field will increase over the next three, four, five years. They keep hitting more new holes.
Kornitzer said the fund will decide to trim ExxonMobil sometime in January or February. The decision will depend on the price of energy up to Europe this winter. It also rests on political considerations, such as whether the energy sector incurs a heavy regulatory burden, says Kornitzer. Also, how much will depend on any dividend increase the company announces in early 2023.
The stock market storm of 2022
Unusually among mutual funds this year, the Buffalo Variable Income Fund has been a safe haven from the 2022 market storm.
The fund is up 5.71% this year through Wednesday, compared with the S&P 500’s 15.08% decline. The fund’s large-cap direct rivals lost an average of 4.32%.
At equal value, in the three years ended Oct. 31, Buffalo Variable Income lost just 77% compared to the S&P 500. However, it has gained 85% of the popular index’s advances. “I’m not a go-go-go stocks kind of guy,” Kornitzer said. “I haven’t. I don’t want to. I’m a solid, conservative investor. I’ll protect your money.”
Pensioners looking for income
Basically, this fund is for shareholders willing to sacrifice a little upside potential over the long term for less volatility.
In part, the fund aims for that trade by focusing on stocks that can generate income. Income generators tend to be more financially stable stocks than many other stocks. Many of these stocks have fared better than the overall market during this year’s market turmoil.
The fund’s 12-month yield is 1.54% versus 1.6% for the SPDR S&P 500 ETF ( SPY ), which tracks the large-cap bogey. “This fund is good for retirees looking for stability and income,” Kornitzer said.
The fund has outperformed its Morningstar peer group by 88 percent over the past three years. And over the past five years, it has risen more than 68 percent.
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