DAY HAGAN STRATEGY UPDATE
Day Hagan Tactical Dividend Strategy Update December 2016
General commentary regarding the financial markets and an update regarding the Day Hagan Tactical Dividend Strategy.
December 5, 2016
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The Day Hagan Tactical Dividend Strategy (DHTD) returned +4.90 percent gross of fees and +4.81 percent net of fees during the month of November. Year-to-date through 11/30/2016, DHTD is up 12.19 percent on a gross return basis (+11.64 percent net of fees) versus the S&P 500 at +9.79 percent and the Russell 1000 Value at +14.48 percent. (Results reflect total returns.)
The portfolio had only one transaction in November, that being the purchase of McKesson (MCK) on the first day of the month. MCK is part of the Medical Distributors industry group, which is also buy-rated in our work. Adding MCK proved to be a well-timed move, with MCK up over 13 percent during the rest of November. As discussed in last month’s update, the opportunity to buy MCK came as a result of a significant price drop in the aftermath of quarterly earnings and guidance that were below expectations. Based on our objective discipline, we felt the extent of the move was unwarranted and exaggerated.
Certainly the election outcome was the overriding story related to market movement in November. Our asset management group led industry performance during the month, with a much maligned name, Waddell & Reed (WDR), up over 24 percent on a price-only basis (not factoring in meaningful dividend yield). Both before and after this positive price move, we note without surprise that there were/are no sell-side buy ratings on WDR.
On the subject of contrarian plays, our discount stores industry grouping is up nearly 12 percent since purchase in the latter half of October, led by Kohl’s (KSS). Analytics firm comScore revealed that three of our discount stores holdings were ranked third through fifth, after Amazon and eBay, for Cyber Monday traffic (WMT, KSS and TGT in that order), showing impressive online strength for these retailers. The results supported one of our main theses that improving e-commerce initiatives would play a significant role for the companies we own.
The recent portfolio purchases in late October and early November of discount stores, MCK and Eaton Vance (EV) in Asset Management, as well as FedEx (FDX) in Airfreight & Logistics, are all consistent with our process of buying names at trough valuations. It is not common historically that we see the benefit of portfolio moves as quickly as we have with these particular names, but regardless, the intent is to buy at levels which significantly manage downside risk while realizing upside over time.
Finally, with rates ramping up, the yield on the 10-year Treasury note is now above the dividend yield on the S&P 500. Income-producing and traditionally more defensive industries had a difficult month (utilities and consumer staples sectors were both down in the mid-single digits). As a result, many dividend-focused equity managers did not do well in November. On the other hand, DHTD, while focused on dividend-yielding names, is somewhat differentiated. Income is a byproduct of our process, not the overriding goal. Rather, we use yield as an objective means to evaluate value in relation to upside (and downside) potential. Coming into November, we saw most traditional dividend income plays as vastly overvalued but found attractive value in other industries, some of which are mentioned above. Typically, while we can benefit from market interest in dividend payers, our process generally allows us to seek out opportunity even if that is not the case.
If you have any questions or would like further details, please feel free to contact us.
- Robert Herman
- Donald L. Hagan, CFA
- Jeffrey Palmer
- Arthur S. Day