Day Hagan Strategy Update

DAY HAGAN STRATEGY UPDATE

Day Hagan Tactical Dividend Strategy Update: November 2016

SUMMARY

General commentary regarding the financial markets and an update regarding the Day Hagan Tactical Dividend Strategy.

POSTED

November 4, 2016

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Year through October 2016, the Day Hagan Tactical Dividend Strategy (DHTD) has returned +6.95% gross of fees and +6.52% net of fees versus the S&P 500 at +5.87% and the Russell 1000 Value at +8.29%. All numbers are total return.

DHTD maintains elevated cash positions as dictated by its objective, yield-based methodology. Capital preservation is a primary goal of the strategy as indicated by historical ~50% downside (and ~75% upside) capture versus benchmarks since inception. That being said, the portfolio was active during the second half of October, reducing cash holdings in the process.

Forward Air (FWRD) was sold in our Airfreight & Logistics industry grouping in exchange for the more attractively valued (and more liquid) FedEx (FDX). Eaton Vance (EV) was added to Asset Management showing an attractive buy signal, while Janus (JNS) was subsequently sold after realizing a gain since February of this year. JNS was sold at this point primarily because of its announced merger with UK-based fund company Henderson Group. The deal structure led to concerns around JNS shares being reliant on the direction of the British pound. Also, Fidelity Information Services (FIS) in IT Services was sold after gaining about +40% since May 2014 purchase; the underlying industry continues to be held.

The reduction in cash during the month, however, was primarily due to an industry buy: Discount Stores. After having been out of Consumer Discretionary names since the profitable sale of Restaurants in July (which have since pulled back in price), the Discount Stores came into a clear purchase range based on our process. Four names in particular show as meaningfully undervalued and fundamentally sound with attractive upside. As we seek out trough valuations in our methodology, we typically take a contrarian view in terms of buy industries and specific names.

With that contrarian perspective in mind, it is also worth noting that McKesson (MCK) was added to Medical Distributors on November 1, after its precipitous price drop on October 28 owing to an underwhelming quarter. MCK is a useful case study related to our strategy. It is a name we have owned in the past: Held between October 2011 and May 2014, we realized about +130% in long-term gains. After last week’s massive pullback, we took a hard look and felt that concerns around price competition in the pharmaceutical distribution business (and to a lesser extent, reduced brand price inflation) were exaggerated and not likely to consequentially persist. Aging demographics, the expansion of medical insurance and the increasing use of pharmaceuticals for patients all provide a healthy strategic outlook. With a starting point of our yield-based valuation modeling showing MCK as a “buy” name, we also view MCK’s underlying fundamentals as strong, including a roughly +17% FCF (free cash flow) yield at the time of purchase.

Within Medical Distributors, AmerisourceBergen Corp (ABC) and Cardinal Health (CAH) traded down on October 28 in sympathy with MCK. These three companies, “the big 3,” have a combined 90% market share in the pharmaceutical distribution business and thus significant market power. Over subsequent days, both ABC and CAH reported quarterly results that exceeded lowered expectations, supporting our strategic view on MCK. We do own two other names in Medical Distributors, Patterson Companies (PDCO) and Owens & Minor Inc. (OMI), both of which were in positive territory on the same day MCK declined, showing the value of sufficiently diversifying within our industry groupings.

With October’s trades, the portfolio now holds 7 industries and 30 names across sectors, alongside roughly 20% cash. As always, our process remains disciplined and consistent.

If you have any questions or would like further details, please feel free to contact us.

Sincerely,

  • Robert Herman
  • Donald L. Hagan, CFA
  • Jeffrey Palmer
  • Arthur S. Day

Note: The S&P 500 Index is based on the market capitalizations of 500 large U.S. companies having common stock listed on the NYSE or NASDAQ. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. Indexes are unmanaged, fully invested, and cannot be invested in directly.

Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM, accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. DHAM uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior DHAM recommendations or DHAM performance rankings, one should also consider that DHAM may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of DHAM’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

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