Dr. David Kass

DAVID KASS’ PICKS OFTEN OUTPERFORM THE MARKET. HERE ARE HIS LATEST PICKS.

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.

The Wall Street Journal published my Letter to the Editor on Federal Reserve policy:

Regarding James Grant’s “Powell Has Become the Fed’s Dr. Feelgood” (op-ed, June 29): It seems that the author is suggesting that the Federal Reserve should abandon its congressional mandate of conducting monetary policy to achieve the dual objective of maximum employment and price stability. The Fed’s expansion of its balance sheet, along with parallel actions taken by Congress and the Treasury, has facilitated the stabilizing of the U.S. economy by plugging the hole of substantially reduced demand by consumers resulting from the Covid-19 induced lockdowns. This effort by the Federal Reserve is intended to prevent the current recession with the highest unemployment since the 1930s from becoming the Great Virus Depression. The Federal Reserve is applying the lessons learned from the restrictive monetary policy of the 1930s and the accommodative policy to address the Great Recession of 2007-09.

Prof. David I. Kass

University of Maryland

College Park, Md.

The largest 5 stocks by market capitalization are substantially outperforming the S&P 500 and the Dow Jones Industrial Average (DJIA) Year-To-Date (YTD) as of June 19, 2020.  The total market capitalization of these 5 technology stocks equals $6.0 trillion, approximately 20% of the total capitalization of the S&P 500 ($27 trillion).

(1) Apple ($1.52 trillion) —       +19.1% YTD

(2) Microsoft ($1.48 trillion) — +23.8%

(3) Amazon ($1.33 trillion) —   +44.8%

(4) Google ($973 billion) —       +6.4%

(5) Facebook ($681 billion) — +16.3%

Also,

Netflix ($200 billion) —           +40.2%

S&P 500 —     -4.1%

DJIA     —       -9.4%

Nasdaq  —   +10.9%

Berkshire Hathaway ($440 billion)  —  -20.0%

I am quoted in this InvestorPlace article:

When asked about the impact on the economy, Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business said in an email to InvestorPlace, “To prevent the recession from becoming a depression, the Federal Government will have to plug the hole in the U.S economy, created  by the substantial drop in consumer spending, with trillions of dollars of additional spending by the Federal Reserve, Treasury and Congress.  … The Federal Reserve can provide trillions of dollars in loans to support the economy. This funding would assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services until there is a widely available vaccine.”

With the S&P 500 rising about 40% from its March 23rd low and NASDAQ closing above 10,000 for the first time today, is the stock market social distancing itself from the economy with a 13.3% unemployment rate in May?

The Federal Reserve today released its projections for 2020, 2021, 2022 and beyond.  These projections are optimistic. Although they forecast a 6.5% decline in real GDP for 2020, the projections of 5.0% growth for 2021 and 3.5% growth for 2022 are consistent with a strong economy. Their longer run (beyond 2022) projection is for 1.8% growth.

The current unemployment rate of 13.3% for May is projected to decline to 9.3% by the fourth quarter of 2020, and then to 6.5% in the fourth quarter of 2021 and 5.5% in the fourth quarter of 2022. These projected rates for 2021 and 2022 are very close to the average unemployment rate of 5.7% since 1948 and 6.2% over the past 50 years. Beyond 2022, the Federal Reserve projects an unemployment rate of 4.1%.  The unemployment rate of 3.5% in February was a 50 year low.

Furthermore, inflation is projected to be only 0.8% in 2020, 1.6% in 2021, and 1.7% in 2022.  It is then expected to equal 2.0% in the longer run.

The Federal Funds rate is projected to remain at 0.1% through at least 2022 and then rising to 2.5% in the longer run. Therefore, the Federal Reserve is not expecting to increase interest rates at least through the end of 2022.

The stock market is forward looking.  Its very strong performance since the March 23rd lows is consistent with the Federal Reserve’s forecasts of a recovering economy with healthy GDP growth, improving unemployment, and low inflation.

The stock market may be social distancing itself from today’s weak economy, but not with respect to the projected economy over the next two years and beyond.