Mitzi Perdue

Chad Naylor’s Investments and His Not-So-Secret Sauce

By Mitzi Perdue

Chad Naylor from Naylor & Company Investments, LLC has an investment thesis that’s enabled him to make some extraordinary profits.  Since the company’s founding over 14 years ago, their annualized stock investment returns, net of fees, have been 15.5%, net of fees, from 4/10/2003 to 12/31/2017.

For comparison, the Russell 3000® figure for this period was 10.5%.  Some of his successes include buying Priceline for $25 a share in back in 2004, while today it’s $1850.  In 2010 he bought Expedia for $28 a share and it’s now $125.

How does he do it?

The Not-So-Secret Sauce

“When an industry goes into a downturn,” Naylor points out, “the weaker competitors get weeded out. Those that survive are stronger, leaner, and better positioned going forward.”

With this in mind, his approach is to find the strongest competitors in industries that currently have a bad reputation. “When the banking crisis happened, we picked up banks, and when Obamacare passed, we bought United Health, Aetna, Humana, WellPoint.”

He continued with this pattern when the airlines were under stress.  He bought Delta, Alaska, and United. A few years after the housing crisis hit, he bought Owens Corning and Mohawk.

“You have to be patient and you have to be able to wait several years, but you can frequently find stocks that will see price increases of five or ten times what you paid for them.  You need only a few of those,” he says with obvious satisfaction, “to get some very good returns.”

Industry has been noticing. Morningstar gives his company a 5-Star Rating.  And Pensions and Investments Magazine spotlighted him in one of their quarterly reviews, and recently (12/31/17) ranked their strategy as Number 2 in the country for their 5-year returns in the category of U.S. Stocks for SMA Managers.

Naylor recognizes that his approach isn’t for everyone.  “A lot of people don’t want a stock that’s perceived as weak. They’d rather have a steady Coca Cola, even if it may be over-priced and offers subdued long-term return prospects.  They’d rather be in sync with the market.  And they may not want to wait the three to five years that this kind of strategy often requires.”

 What about Strategy for the Future?

Today, Naylor’s strategy includes factoring in the near-certainty of future interest-rate increases.  “Interest rates have been abnormally low for a long time, and that means bond prices are very high.  But we’re now starting to see that interest rates are heading up.”

As he goes on to explain, “That means we’re most likely in a state of rising interest rates and this is bad for bonds.  It means the principle on your bonds will go down.”

Large numbers of individuals, recognizing that rising interest rates are bad for intermediate and long-term bonds, have moved from bonds into stocks that pay dividends. The problem with the approach of buying “bond-proxy stocks,” is that they’ve been bid up beyond their underlying value.

Naylor’s current strategy is instead to focus on investments that will do better in a world of rising interest rates.  These include investments in banks, healthcare, cyclicals and small to medium-sized growth companies.

What about another 2008-style crash?

Naylor believes that, given the fact that the recovery was exceptionally slow, there’s still a lot of room for the recovery to continue.  And further, the banks, he reasons, are no longer the kind of systemic threat that they were a decade ago. “The banks are stronger, by some measures, than they’ve ever been.”

His focus, then is on factoring in rising interest rates and avoiding over-priced stocks.  Given his track records so far, Chad Naylor is an investment advisor worth listening to.

To reach him, call him at: 415-741-7280 or visit his website at http://www.naylorinvest.com.  His e-mail is:  chad@naylorinvest.com.