It is time once again to pick our favorite stock for 2017. Each year, everyone even vaguely related to finance and the markets seems to offer up their predictions for the next year -- and picks their favorite stock. My prediction is easy. The stock market will be open between 9:30 a.m. and 4 p.m. ET most weekdays, and prices will fluctuate in 2017. Picking my one stock for the next year is a bit challenging. I don't mind concentrated portfolios, but narrowing it down to one pick for the year is a daunting task.
I spent a lot of time thinking about which stock to pick this year. I came close to picking Brookfield Properties (BPY) , as that is probably my favorite long-term real estate pick. I also considered selecting Volt Information Sciences (VISI) , as that is my largest position -- and when the turnaround finally takes hold, the stock can easily double or more from the current price. I considered going with a community bank, but all the banks that still fit my investment criteria after the recent run are really small.
The truth is that one-year results from any one stock can be quite random. If rates go up too much, commercial real estate markets will slow and shares of Brookfield will be stagnant. I do think next year will be the year Volt finally gets it right, but I thought the same about the stock at this time last year. While most of my small banks have done very well, I do have a handful I have owned for several years that have pretty much done nothing.
After careful consideration of all of the above, I decided the wisest course of action. I decided to cheat. I am going to pick a value-oriented closed-end fund that is trading at a steep discount as my one stock to buy for 2017. The Boulder Growth and Income Fund (BIF) trades at a discount to Net Asset Value of almost 20%, and has performed pretty much in line with the S&P 500.
This is basically a Warren Buffett clone fund. Approximately 20% of the fund is invested in either Berkshire A or B shares, and the fund's investment philosophy is to invest in good businesses at attractive valuations for the long run. If that sounds like it comes from a Berkshire annual report, that's not an accident. The lead manager of the fund is Stewart Horejsi, a Berkshire billionaire. Horejsi started buying shares of Berkshire at around $240 a share back in 1980, and kept buying as the stock went higher. He used the cash generated by his family-run welding supply business to keep buying the stock, and it has made him a very wealthy man.
He and his assistant fund managers, Brendon Fischer and Joel Looney, run a decidedly Buffetesque portfolio. In addition to the Berkshire stake, the fund holds sizable positions in Yum Brands (YUM) , JP Morgan (JPM) , Chevron (CVX) , Walmart (WMT) , Cisco (CSCO) , Caterpillar (CAT) , Pfizer (PFE) and Wells Fargo (WFC) . A discounted closed-end fund, Cohen & Steers Infrastructure (UTF) round out the top 10 holdings of the Boulder Growth and Income. This group of 10 accounts for about 70% of the funds' assets and portfolio turnover is just 12%, well below the average mutual fund. (WFC and CSCO are
Action Alerts PLUS holdings and PFE is a Dividend Stock Advisor holding)
One of the knocks on the fund is that Horesji owns more than 40% of the fund and has no immediate incentive to do anything to eliminate the discount. While there is some truth to this, the fund managers are aware of the discount and have taken some steps to address the issue. The have a managed distribution plan that provides a distribution yield of 4.56%.
In the mid-year shareholder letter, Fischer noted, "Since distributions are made in cash, or in other words at NAV, they will be accretive to the market-priced-based return as long as the Fund's market share price is at a discount to its NAV." He added, "If these distributions were reinvested into the Fund at a similar discount, the net effect on performance should be roughly similar to the Fund doing a share repurchase in place of the managed distribution program. The nice thing about the managed distribution program is that it is expected to be recurring in nature and benefits all stockholders equally."
I would also note that Horesji is almost 80 years old, and at some point, the torch will pass. In the interviews and other press coverage, he comes across as a decent guy who wants to do the right thing by his shareholders. At some point in the future, I do think you will see the discount narrow somewhat. In the meantime, the portfolio has been performing well, and you can use the dividend reinvestment program to increase your holdings while they are below NAV.
Boulder Growth and Income Fund as my 2017 pick is the best of both worlds. It is a security that has a good chance of beating the market in 2017, and I will most likely avoid looking like a moron by selecting a stock that simply does not work out in the one-year timeframe.