Two to three percent dividend yield as a purchase requirement
Covered calls take advantage of market volatility
Energy stocks responsible for outperformance
The Buffalo Flexible Income Fund is doing well in the current market despite inflation, supply chain issues and interest rate policy. “Our investment strategy aims to provide returns for any investor who needs monthly income with capital appreciation, and we use many methods to address potential downside risk,” John Kornitzer is quoted as saying on the Buffalo Funds website. Founded in 1989, Kornitzer Capital Management manages assets totaling up to eight billion US dollars, including ten Buffalo funds.
Kornitzer’s investment strategy
Launched in 1994, the Buffalo Flexible Income Funds is down just 2.93 percent year-to-date (closing price 07/01/2022) and manages $455 million in assets with the goal of generating both investment assets and capital growth. The fund can invest in both bonds and stocks, but is actually primarily invested in large-cap stocks. A prerequisite for an investment is a dividend yield of two to three percent.
Kornitzer increases returns through covered calls and protects the fund against price losses. This is a dividend growth strategy that uses covered call options to take advantage of market volatility. So Kornitzer writes covered call options if he already owns the shares. He’s selling it “out of the money,” the investor tells Dow Jones Newswires, so he’d only be forced to sell a stock if the stock rose at least 20 percent and he was going to sell it anyway, or at least downsize.
Buffalo Flexible Income Fund stock picks
As of March 31, 2022, the largest position in the portfolio was Microsoft with 8.49 percent, followed by Chevron with 4.15 percent and Hess with 3.60 percent.
Kornitzer’s stock selection has proven itself in the current market. Kornitzer explained his preference for companies that pay 2-3 percent dividends to Dow Jones: “If I hold a stock that pays 3 percent for 10 years and the stock stagnates, I got 45 percent of my money back.” An exception here is the largest position in the portfolio: Microsoft, with a return of just 0.98 percent. However, according to Kornitzer, it should be noted here that the return on the share based on its original costs is currently more than 10 percent and thus fits back into the picture.
Kornitzer also clarifies his position using two companies that do not pay a dividend yield and whose price development has recently brought investors significant losses: Meta and Carvana.
Both stocks have plummeted since the beginning of the year after soaring: “They rode up, rode down and got nothing,” Kornitzer told Dow Jones Newswires. If sales increase by hundreds of millions and investors don’t make any money, then something is wrong, the major investor continues.
Buffalo Flexible Income Fund: Using Energy Stocks to Outperform
Kornitzer cites the 20 percent focus on energy stocks as the reason for his fund’s outperformance this year. Although true to his active management style, he has already sold energy stocks this year so that no position in the fund becomes too large. The shares of the following companies made a significant contribution to the performance of the Kornitzer fund in 2022: Chevron shares, the third-largest position in the portfolio, have risen by almost 24.70 percent to $146.51 since the beginning of the year. Exxon Mobil shares, which are in 10th place in the Buffalo portfolio with 2.78 percent, even rose by around 42.9 percent to $87.55. The shares of the Hess oil group climbed 42.61 percent to $105.39 north (closing prices on July 1, 2022). The New York oil company with a market capitalization of 37.12 billion US dollars increased its dividend by 50 percent in March 2022. ConocoPhillips shares make up 3.57 percent of the portfolio. The Texan giant paid a flat regular quarterly dividend this year. In addition, due to rising profits, a variable dividend will be distributed, which has more than doubled compared to the previous quarter. The company was able to increase its profits enormously to 5.8 billion US dollars in the first quarter of this year. The group’s shares also rose significantly on Wall Street this year, by 26.05 percent since the beginning of the year. On June 8, the shares recorded their provisional high for the year of USD 122.720, but since then the price has fallen significantly again, most recently to USD 90.98 (closing price July 1, 2022).
APA Corporation, the sixth-largest position in the fund, grew its revenue to $2.7 billion in the first quarter of 2022, up 167.51 percent year-on-year.
Energy stocks are projected to increase their share of the broader market going forward. The top performers in the S&P 500 this year are energy companies, according to CNN Business.
Other purchase recommendations
According to Kornitzer, another basis for the fund’s success is its concentration on the “right” pharmaceutical stocks. As an example, he cites Eli Lily, one of the largest pharmaceutical companies in the world. The company has been paying a dividend to shareholders without interruption since it was founded in 1885 and increased it by 15 percent in December 2021. The stock is up 17.55 percent year-to-date (closed July 1) at a current price of $325. A dividend of 0.98 cents per share will be paid on September 9 for the third quarter of 2022.
Kornitzer recommends robotics as a promising industry in the long term. Buying opportunities arose here after massive price declines. “Any company that supports robotics will have a bright future,” he told Dow Jones. Robots are used everywhere these days. And if no one is hired, then no one can be fired either, Kornitzer told Dow Jones Newswires.
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