Steven Cress picks Lockheed Martin + Sandisk for balance and diversification, growth and income

0:09Steven Cress:You know him, you love him, you respect his picks. It's Steve Cress. Welcome back to Investing Experts. Always great to talk to you. Always great to be here. It is always great to be here. And it's nice to talk to you because I feel like investors need some clarity once again in terms of how to navigate this market. We were discussing before we hit record, it's a risk on market, it's a risk off market, it's constantly changing, the market is up, it's hitting record highs, it's down. Why is it down? Why is it up? Why isn't it piggybacking off of this headline? Why is it piggybacking off of this headline?

0:46Steven Cress:So how would you clarify, how would you encourage investors to think about investing looking at this market right now? balance and diversification. Keep investing. You never know when the market's going to be up or down. It has definitely been a very strange year. Here we are in August and the market, the S &P 500, is touching all-time highs. But in a way, you almost would not know, especially if you are overweight technology. There have been so many episodes of risk on, risk off, as you've mentioned this year, it's kind of hard to tell where to be. So at one point in the year, technology was outperforming all sectors.

1:30At another point in the year, energy was outperforming all sectors. At another point in the year, you could see there was a clustering of healthcare and consumer staples and utilities. And then it goes back to AI stocks. The AI trade and risk went off the table pretty much starting in the beginning of June. And we've seen some of those stocks start to rally back. And the rotation went into like the safe haven sectors. This is really, you know, the second or third time this year we've seen this kind of rotation occur. But the S &P continues to move forward to new highs. So in this kind of market, you want broad exposure, you want diversification.

2:15And being that there are geopolitical risks, there's seasonality risk with midterm elections coming up. There's obviously inflation risk. The over a year numbers were still quite high. Even though the core numbers look better, you can't ignore it. Energy prices are far higher than they have been. So that's impacting CPI. And there's no telling with the geopolitical events which way that's going to lead. So will interest rates up? Will interest rates stay unchanged? There's a lot of uncertainty there. So my guidance is keep investing, but go for diversification. And we particularly like what I call barbell approach is where we combine income oriented stocks with being opportunistic and buying great stocks with good fundamentals that have come off in their price.

3:12and we have definitely witnessed that over the last month and a half.

3:16Steven Cress:Basically a way to hedge both sides of the coin. Right? Yeah, I used to run a hedge fund that I think if I had to redo it, I would use this approach. Now, technically when you're hedging, you need to be shorting stocks, but I actually kind of like the approach of being in growth-oriented stocks that have strong fundamentals. But as my hedge, and typically the stocks that produce the income, aren't those risk-odd type of stocks. They're not like the IT stocks or the consumer discretionary stocks or some of the high-beta industrial names. You tend to find financials, healthcare stocks, utility stocks, REITs as the income generators.

3:59And it's a really nice offset to the growth perspective. And you want to continue to invest on a monthly basis. But when you hit markets like this, which still have so much uncertainty, that diversification, I believe, is key.

4:15Steven Cress:So how do you approach it? What do you use for growth? What would you use for income? Are you looking at specific stocks? Are you looking at specific sectors? I know you had an article this past week that discussed this also. How do you discuss that? How do you encourage investors to think about this barbell approach? Yeah, the article, feel free to click on it. It's called Navigating Market Turbulence, Six Top Stocks for Balancing Stability and Growth. It came out on August 13th. And if you click on it, please follow me so you can see some of my other articles as well. But it really speaks to the environment that we're in.

4:55There's any number of ways that you can identify these stocks. You don't have to go on my recommendations. Seeking Alpha has a screening tool where you could identify growth stocks or you can identify dividend stocks. So it's available. But in particular, one stock that I do like is Lockheed Martin, which is an income-generating stock. The yield on it currently, it's 2.3%, so it's significantly higher than the S &P 500. And even at 2.3%, it would be higher than many income-oriented ETFs. By example, the Vanguard High Yield Index ETF has a yield that's only about 2%. So Lockheed Martin coming in at 2.3 % for its forward yield is above that.

5:40But it's an industrial company in the aerospace of defense. It's the largest out there. And being that, unfortunately, we've had so many wars throughout the world between the Ukraine and Russia, the Middle East, the U.S. and Iran, a lot of stockpiles worldwide are quite low. So it puts Lockheed Martin in a very good position. Their valuation is in line with the industrial sector. And right now, the growth is in line with the industrial sector. But we have a lot of analysts revising their numbers up for Lockheed Martin. So I think that continues to put it in a good place. So yes, that's usually about 2.3%.

6:23So that would be my, and whenever I do have an income-oriented idea, it typically is a strong buy or buy as well. So I look at that directional rating different than I do the dividend yield. For a dividend yield, my primary concern is that the companies will maintain that dividend. So we have another set of factors that we use, which I called dividend grades, and we have a dividend safety grade and a dividend growth grade. So when I do look to buy dividend stocks, I make sure in terms of those dividend grades that they're at minimum in the C plus B minus range. And I feel fairly confident that your dividend should be safe with those.

7:05Then we have our directional recommendation, which is a strong buy, buy or hold, which means that stocks should offer capital appreciation as well. So we're kind of combining, looking for capital appreciation and income at the same time. And Lockheed Martin fits right in that. If I were to look on the growth side, one of the stocks that I like a lot now is SanDisk. This is in the IT sector, specifically in the technology hardware and storage sector. SanDisk is a name that's actually really well known, like thumb drives. These little red thumb drives have been around for decades. It's a SanDisk on it that pretty much is known as the memory stick.

7:52company, but as I often say, it's no longer your father's send this memory stick. They are heavily involved in data centers and memory for data centers. And this has meant a lot for their company in terms of growth. It's one of the few companies that in the IT sector is incredibly cheap. So in terms of valuation, we have an A plus grade on it. And that A plus grade gives you an instant characterization, saying this is far cheaper than the rest of the sector, the factor grades that we use are always relative to the sector. So whether you're looking at the value, growth, or profitability, AC at A grade or an F grade gives you that instant characterization of where it is versus the sector.

8:36And when you click on valuation for SanDisk, it's got a PE, Like this is incredible. It's Ford PE is only 6.96 times versus the sector at 30 times. So it's incredibly cheap versus the sector. But if you look at the company's Ford growth rate, the EPS growth rate right now, Ford growth is 345%. So it is tremendous growth. It is incredibly cheap. So it's one of our top strong buy recommendations. And we have this in our AlphaPix portfolio, as well as in our PQP portfolio, which are focused on growth. And I should mention Lockheed Martin is in our Quant Growth and Income portfolio, which is a product rebalances once every two weeks, maybe two to three trades a month.

9:37But all the stocks in the Quant Growth and Income portfolio, they pay dividends. where with AlphaPix and PQP, that's not a criteria. So it's nice to have a balanced approach for the individual stocks or for portfolio services. If you want to have both, you can have the Quant Growth and Income and a product like AlphaPix. So you get that nice balance of focusing on capital appreciation as well as income generation.

10:04Steven Cress:I have a couple of questions about Lockheed Martin, but I also, as long as you're talking about the Quant Growth and Income Portfolio, which we had an episode a month ago, a couple months ago with you introducing that portfolio. And just to kind of update our audience on that portfolio, much like your other portfolios, Steve, it's doing gangbusters. So I would love it if you could share an update with our audience about that. Yeah, absolutely. This has actually been since the beginning of June, it's been the best performing portfolio. We launched it on June 3rd. And since June 3rd, it is up 12.74%.

10:43And the benchmark, which is that Vanguard high yield index ETF is up only 4.4%. But at that, it's beating so many different sectors. So right place at the right time, even though the S &P 500 is near an all-time high. The stocks within this portfolio have heavily been rewarded during this risk-on-risk-off phase and period of uncertainty. So it has a fair amount of financial stocks in there, REITs, some industrials, some healthcares. So it's really been in the right place at the right time. And the good news is, with this portfolio, you would really never expect this from a portfolio that's focused on growth and income.

11:26but some of the returns have been amazing. So we have Federal Agriculture Mortgage in Quant Growth and Income. It is up 32.5%. We have Marathon Petroleum up 32%. Valero Energy up 30%. RTX Corporation up 27%. Philips up 25%. First Source up 21%. And conversely, pointing at the losers, which I always do to be transparent, the worst performing stock is only down 4.6 % and the second worst performing stock is only down 1.64%. So you can see our winners are way, way, way outperforming the losers in the portfolio. So definitely a really good product for especially periods of uncertainty that we're in now.

12:17And as I said, there are geopolitical issues across the world. We have the midterm elections coming up, which going back to 1925, for the 25 midterm elections, the market is usually pulled back ahead of that election. It does well after the election, but usually the markets are soft prior to that period.

12:38Steven Cress:The QG &I portfolio seems to be proof that the barbell approach works, especially during these types of market environments. It is. And that is focused in both capital appreciation and income generation, but it's not quite as capital appreciation oriented as a product like AlphaPix or PQP, which tends to have many more technology stocks in it. But that's why, you know, what I like about both approaches is I want to be opportunistic. So really, you know, the best time to get in these stocks is when the market pulls back. So you want to identify companies that have strong fundamentals that have come off their highs.

13:19And we're in a perfect period to do that. And I really started pushing Micron Technology and Sandus really earlier this week. And people have already been rewarded. Investors are starting to return to some of these AI stocks. And usually the ones with the good fundamentals come back the sharpest and the vastest.

13:39Steven Cress:Are you worried at all? I still have those questions about Lockheed Martin. But are you worried at all? Or I guess, when do you start to worry about how much further the run-up has in stocks like Micron and Sandisk? Like what are the telltale signs that will make you step out of those names? Yeah, when the quant rating goes to a sell or a strong sell. Which would be evidenced by, like what catalyst would cause that to happen? So we would see growth for the companies drop dramatically, or we would see the valuation skyrocket, or we would see profitability come off sharply. We would see analyst revisions come off sharply.

14:16We could see momentum come off sharply. So when we identify stocks, we're looking at five factors, especially when we're buying. They have to be collectively strong on those factors, which are value, growth, profitability, analyst revisions, and momentum. And conversely, when those factors aren't working, and we have just as many strong buys as we have strong sales and just as many buys as we have sales. So it really equalizes in the portfolio. And just as you have factors that are positive, you have factors that are negative. So if any of these companies which have these good fundamentals, the factors started to go sideways or south, the model would pick up to it and the ratings would drop down to sell or strong sell.

15:01Now, hold is a hold in my book. And I've mentioned before, even with our Alphapix portfolio, if a stock drops to hold, we actually keep it in the portfolio for 180 days as a hold. So hold does mean hold.

15:15Steven Cress:And how typical is it, if at all, for a stock to go from a strong buy to a strong sell in one fell swoop? Or is it a gradual kind of decline? It's more of a gradual decline. you typically don't see that, but it does happen on occasion. And typically there'll be some type of impact for a company's business. It could be any number of things, their products shut down or the imagination could go wild on the number of things that happen. It happens, but not that often. It's usually more of a gradual, strong buy to hold and then after a certain period of time, usually a number of quarters, a stock will drop from a hold to a sell.

16:03Steven Cress:And in terms of the dividend grades, like if you look at Lockheed Martin, we show you on Seeking Alpha like three months ago how it looks six months ago, and you can see that it's been pretty consistent for them in terms of their dividend payments. What would you see in terms of like, let's say a dividend is about to be cut, what would you see along the way? Or do you just see a headline, the dividends cut, and then it'll go from like a strong buy to a hold, let's say? That's a really good question. And what we try to do with the dividend grades is help people avoid dividend cuts. That's really the most important fact of why we established the dividend grades is we did not want to recommend stocks, especially for investors that depend on that income, to be in a risky situation.

16:51So I am pleased to say that backtesting this going back to 2010, we found with the dividend grades that we put in place, especially for the dividend safety grade, that 98 % of dividend cuts were averted if a dividend grade ranged from A plus to B minus. So you can feel fairly comfortable, okay? So we have these metrics set in place that we backtested. and so long as a company meets those metrics, and these are sector relative, so that's why we have these grades, so long as they meet those metrics, in 98 % of the instances going back to 2010, dividend cuts were averted if you had a stock that had a grade between B minus and A plus.

17:42Conversely, we found that 91.3 % of all stocks that cut their dividend had a dividend grade between F and C plus. So if you own a stock and you could put it into the portfolio tool or you just put it on the stock page and put the symbol in and you see that that dividend grade ranges between, that dividend safety grade ranges between F and C plus, that should definitely be a warning flag to you. And you can actually click on the dividend safety grade and it will show you all the underlying metrics that we look at. And there's over a dozen metrics that we look at for the dividend safety grade. And it will show you with each metric which one has an A, which one has a B, which has an F.

18:26So that is something I would definitely focus on. And that's kind of the telltale, which leads into your question. Hopefully we know by that dividend safety grade if a company is at risk of cutting a dividend. And if it's doing its job and you see a dividend safety grade that's a D, that is an indicator to you, you don't want to own this stock if you're depending on the dividend. Now, there will be many situations where companies could have a dividend safety grade of a D, but the stock is a strong buy. And, you know, in situations like that, companies have decided that they want to grow their earnings, they don't want to grow their dividend, so the dividend could be susceptible to being cut because they're putting cash flow back into the company, which could make it a straw buy.

19:14So there are two different things. The dividend grades are there just to really measure dividend safety and dividend growth and dividend consistency. They are not the tool that we use to indicate the momentum of a stock up or down. That momentum of the stock would be in the quant factor grades and that directional recommendation where you see the rating of strong buy, buy, or sell. So if you are dependent on a dividend even if the stock is a strong buy, if that dividend grade comes up as a C or C minus or a D or a D plus, know that there is potential risk to that dividend.

19:53Steven Cress:First of all, that's some really interesting data because it sounds like we've solved for the dividend cut issue. And also, there's more nuance to what it means to have maybe not a great dividend score, but great other scores. And so you're getting into it for a different reason other than income generation. Yeah, absolutely. And many, many, many, many of stocks can have a poor dividend safety grade or poor dividend growth grade. And it's usually, if it's a strong buy, typically earnings per share is doing well, cash flow is doing well, revenue is doing well, the valuation is good, profitability is good, but it's at the expense of not having money set aside for the dividend.

20:35So it's quite possible, very possible to have stocks that could have good capital appreciation potential, but your dividend could be at risk.

20:44Steven Cress:Can you think of a stock in recent memory that was like that and or a stock that was looking to grow at the risk of their dividend, but then kind of put their power back into the dividend when they did correct course? You know, I can't think of a particular name off-hand right now, but I can tell you like during the pandemic, a lot of companies stopped paying their dividend or suspended the dividend or cut the dividend because of what was going on. And there were a number of high quality companies that did that. You know, and often you'll find like technology stocks are put more of their earnings into the earnings per share, but some of them pay dividends.

21:23but the payout ratios are typically low. The yields are quite low because more of the focus is on generating a return on equity for the investors.

21:33Steven Cress:And then with Lockheed Martin, one of my remaining questions is just around the geopolitical events. If God willing, peace comes to this earth and there's no more fighting, what is your narrative about Lockheed Martin? Is that something that you're looking at along the way? Do they have other stuff going for them? Well, that would be a very good narrative. Fingers crossed that happens. I think one of the reasons why Lockheed Martin is a good stock to own and their sustainability is that the stockpiles have been drawn so low in so many different military classes that need to be rebuilt that they probably have a pretty good backlog ahead of them.

22:17Even if all these geopolitical events overnight, treaties came up and fighting stopped, stockpiles are really, really low. The same thing goes for oil as well. If we had a treaty that occurred with Iran and the Strait of Amuse was open tomorrow, you probably see the price of oil tumble from the high 80s back into the 70s, and you might see some of the integrated oil stocks declined. But for the refiners, that's actually good. And in our portfolio for the quant growth and income, we have a number of refiners. So they would actually benefit by that. So the stocks have already done well, but should there be peace, refiners will continue to do well as the price of oil drops.

23:05It actually improves their margins.

23:07Steven Cress:I wanted to ask a question that I saw come up on social media that I feel like we've talked about, but I just wanted to reiterate for our audience. When you do the screeners for these stocks, you do the screener, but then you also go into the stocks. You're not just doing a screener and then spitting out the list. You're going into each stock and looking at it to make sure that it belongs in the list, correct? Well, for products like AlphaPix and QG &I and the ProQuart portfolio, it is a pretty systematic process. But in essence, it's taking parameters and criteria that I have set to identify that.

23:45I do oversee every one of them. So if something does strike me as off, there's a default where I override it. And that does happen. When I do my stock picks for like January top 10 and for July top 10, that's much more of a manual process because I'm trying to add a little diversification in there. I don't really want 40 % of those top 10 picks to be in one sector. So I'm looking for a little diversification. And that is much more of a manual pick. But with the other ones, we have very strict criteria and parameters set up. So they, for the most part, are systematic processes. But every single week, when we do select those stocks, I am overlooking it.

24:31Steven Cress:Anything that sticks out that you didn't include for a certain reason, and then you're like, ah, I wish I would have included that? Or has it mostly been you're pretty copacetic with the results? As you should be, honestly. I mean, my God, they speak for themselves, but curious if there's anything that sticks out. Pretty copacetic. Our model for QG &I, it's almost seamless. Sometimes with AlphaPix, we do have market cap restrictions sometimes a company could meet the restrictions but the earnings could look suspect they may have had negative earnings and you know for alpha picks we want to exclude any companies that have had negative earnings so we want a seamless like growth rate for a company so there have been times where i've noticed that and we've taken those stocks out pqp has almost no rules whatsoever so we tend to like let that go But even with PQP, a company that has a market cap that's too small where there are negative earnings, I might not let that selection go through.