How Investors Can Buy and Manage Core Stocks for the Long Term

On the June 15 episode of The Morning Filter podcast, hosts Susan Dziubinski and Morningstar Chief US Market Strategist Dave Sekera discuss the buy-and-manage investing strategy for core stocks and one core stock pick. Here’s an excerpt from the episode.

How to Buy and Manage Your Core Stocks

Susan Dziubinski: We talked on a previous episode of The Morning Filter, and it really seemed to have resonated with our audience, this idea of, as an investor, you’re not really buying and holding indefinitely. You termed it more of it as a “buy and manage” type of approach to stock investing.

So, talk specifically, Dave, about how a buy-and-manage strategy works when we’re talking about core stocks, specifically.

Dave Sekera: Everything’s always got a price that you want to own it, and everything’s got a price that you don’t want to own it. And that’s more of how I think about this buy-and-manage strategy. That’s some advice I got earlier in my career from Jimmy. He was the ex-Salomon Brothers trader whom I worked for a number of years, and it was really great training, thinking about how to be able to manage positions.

You have a position on, and when you think about a position, you own it every day. Every day, the market opens up, and you can decide whether I should be buying more of this, I should be holding it, or I should be selling it. In this case, with that buy-and-manage perspective, I think you need to really realize what the valuation of the stock is. Where is it trading? Is this something I still want to own today? And if not, if there’s been a change in maybe the investment thesis for the company, your outlook is changing, the valuation has gotten too high, no one ever went broke taking a profit, so it’s always good to peel some off.

Or conversely, even if that stock is selling off, again, if there’s a change in your investment thesis, and you’re no longer as confident about your outlook for the company, maybe you think that revenue isn’t going to keep up with what you thought it was going to be before, maybe margins are contracting and there’s a change or a paradigm shift within the industry itself that you don’t think that it’s just a short-term blip, and that maybe really impairing the value of the company, then go ahead and certainly take some off the table.

But again, I think you need to approach it with that viewpoint: Every day you can either buy more of this or sell more of this, and I think you want to have that base position. And again, for these type of stocks, more often than not, if they’re selling off and they get into the 4- and 5-star territory, you definitely want to have that dry powder to be able to add more in, and then that way when it moves back up, you can take some of the profit off the table, or if you’re at your full core position, you can hold it there. And conversely, sometimes, the market just gets overly exuberant in a specific sector or a certain name, and at that point in time, if it’s moved up, go ahead, take some of that profit off the table. You can put that money to work elsewhere. Again, I think it’s really managing that position as opposed to just putting it away and forgetting about it.

How Procter & Gamble Exemplifies the Benefits of the Buy-and-Manage Strategy

Dziubinski: Another core stock with another exemplary capital allocation rating, this is from the consumer defensive sector, and it’s Procter & Gamble PG. Talked a little bit about this one on the podcast before, and this one seems very much like kind of a steady-Eddie stock. Is that fair to say about it?

Sekera: It is, and it isn’t. I would say this is actually a really good example of that buy-and-manage investment philosophy. If you look at this stock, I think back in 2015, 2016, it was probably pretty fairly valued. And then for whatever reason, the market lost confidence, had a negative sentiment, and the stock fell in 2018, and it was a 4 star; I might have even touched on the 5-star territory at that point in time. And we held our fair value through that, and then the stock moved up quite substantially for a couple of years thereafter. And in fact, it actually moved up so high, it went into the 2-star territory for quite a while, and it stayed overvalued for quite a number of years.

Again, this was a great one where if you had that position, you could have added to it and then, when it moved up into that overvalued territory, peel some of that off. If you look at the chart, it has sold off over the past couple of months. It looks much more fairly valued today. If you’re not involved now, it might not be the worst time in the world to be able to start a position there. But again, I think this is a good one where that stock had kind of gone nowhere for several years. I mean, you’re at least clipping a dividend coupon there, but again, it’s one of those ones where that buy-and-manage strategy would’ve worked out pretty well over time.

Now, getting away from the stock in and of itself, we do rate the company with a wide economic moat, a couple of different factors behind that: a low uncertainty rating. Overall, when you think about the company, like you said, kind of a steady-Eddie, household consumables, the types of things that you just need day-in, day-out. But the other part of the company that I think we really find attractive is just the strength of their brands. And when you think about what they sell, as a consumer, when you go into the supermarket, grocery store, or whatever, and there are certain items that you’re looking for, you expect retailers to have those specific brands you’re looking for. And in this case, I think that gives the company a lot of leverage against its own clients to be able to make sure that they can extract as much economic value as they can from that brand strength.

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