These stocks are a good starting point for new investors, according to CNBC's top-ranked advisor

Published Thu, Oct 8 202011:44 AM EDT

Key Points

David Rea is president of Salem Investment Counselors, which manages about $1.7 billion in client assets and topped CNBC's annual FA 100 ranking of financial advisory firms two years in a row.
The "internet of things" is a key investing theme right now, according to Rea.
There are around a dozen stocks new investors with at least $50,000 to $100,000 should consider as part of a diversified portfolio, he said.

Salem Investment Counselors topped CNBC's annual list of the top 100 financial advisory firms for the second year running. David Rea is president of the Winston-Salem, North Carolina-based firm, which was founded in 1979 and manages more than $1.7 billion in assets for clients. Clearly, he's got stuff figured out. CNBC connected with Rea to get insight into how he thinks about investing, portfolio management and what companies look good in the current market. (Note: Conversation has been edited for length and clarity.) CNBC: It seems you're a buy-and-hold investor. In fact, you've owned some stocks for decades. Can you give some insight into your portfolio management strategy? David Rea: We tend to manage all the stocks our clients own. Therefore, we believe in being diverse. We're going to own probably 40 stocks. It's the business-school rule: You probably don't want less than 15 stocks, but if you have much more than 50 or 60, you've just got the market. Most of the time, we're going to have exposure in most of the S & P 500 categories: finance, tech, communications and health care. But around that construct, we try to identify longer-term themes, which I think is really where you can have some outperformance if you can pick those correctly. CNBC: Can you give me an example of how you think about themes? Rea: A theme we are really concentrating on is the "internet of things." The whole 5G communication internet-of-everything. E-commerce would come into that. Maybe [also] aging population, A.I., robotics, personalized genomic medicine, maybe energy transition from fossil fuels to renewables. It's things like that. Some of those themes and big companies we've invested in — the Apples, Amazons, Alphabets — cover many of those, are in many of those themes. It seemed to us in the last five to 10 years we could make some outsized bets, so to speak, in some of those thematic areas, and that's served us well. We spend a lot of time trying to think through what could be long-term trends. One we didn't necessarily see coming from the [coronavirus] pandemic was, it appears that the housing industry, with low interest rates and people wanting to get out and have some space, might be in a good longer-term period, or theme, so to speak. CNBC: You've made some buys based off that trend. What are some specific ones you've looked at? Rea: We've owned Lennar even before [the pandemic]. That's been a good longer-term hold for us in housing. But we added to KB Home and Green Brick Partners, which is a much smaller housing play. CNBC: What are some of your best stock picks for someone who's just getting into investing? Rea: If you're just starting up and have a relatively small amount of money, you'll probably need to do some [exchange-traded funds]. You'll probably need to do some index funds — maybe the Nasdaq index fund, the S & P 500 and a midcap [fund], that kind of thing. But what if you have $50,000 or $100,000 and you're going to buy a diverse group of stocks? I'd certainly encourage folks to look at the great tech companies in the U.S. Our top 10 stocks, I think, would be a great starting point for people — Apple, Microsoft, Amazon. Lowe's Hardware is part of this housing trend and doing fantastic. Berkshire gives you exposure to all sorts of industrial names. Pepsi, Alphabet, Facebook and then a couple banks like JPMorgan and Bank of America. For housing, I would do Lennar; Alibaba, for a great Chinese tech company, Nvidia, Qualcomm. That'd be a good [group of] names to start for people. Then if they'd add in a good, small-cap ETF or index fund. And I'd always tell people, this is not a short-term thing here you might embark upon. The swings can be quick and violent and you really can't predict when they're coming, so you have to be willing to hold through thick and thin in order to really achieve the long-term gains. And to get in, the dollar-cost-average [strategy] is not a bad way. Every month, we can buy some. You keep building the portfolio and adding to it if you have a long time horizon. You can keep averaging in. CNBC: You've said there have only been two or three times over the years when you thought you could make a market call. Can you discuss your thinking there, when you thought you could sort of time the market? Rea: In '87, there was a quick 30% drop in about a week or less. And we thought that was well overdone. It was kind of driven by the early computerized trading. So we added to stocks at that point. Probably the one that was easiest, in a way, was the '99-'00 years when, depending on whether you were looking at tech names, [their price-to-earnings ratios] could have been 100 or 200 at that point. Even on the S & P 500, the P/E ratio was probably close to 30 at one point, and interest rates were going up. It just seemed like a logical place to pare back. And in '08, we were by no means perfect at it, but we did get nervous enough about systemic risk that we sold some things and bought back in '09 as it looked like stimulus was going to be strong enough. Really, in 40 years, that's two or three times. Most of the times it's like it is today — [the market] is not that cheap, not that expensive , but we can find some good stocks.