DAY HAGAN LOGIX TACTICAL DIVIDEND STRATEGY UPDATE FEBRUARY 4, 2019
January represented a strong start to the year for the Day Hagan Logix Tactical Dividend (DHLTD) strategy. The strategy returned +6.52%* for the month. You may recall from last month’s letter that we had opportunistically added to several existing positions in the latter half of December, reducing our cash position in the process. This proved to be a beneficial move. Following our risk management protocols, our January returns were achieved while continuing to hold defensive cash, albeit at lower-than-previous levels. During the month, our benchmark Russell 1000 Value returned +7.78%; all numbers are gross of fees and total return.
We view our invested portfolio as being well positioned to both manage risk and realize upside, with individual price targets of portfolio holdings significantly above current levels. During the month of January, two industries in particular stood out from a performance perspective: energy and medical distributors. In our webinar on January 2, we talked at some length about both of these industries, believing that the ongoing noise around them masked the true underlying, strategic value of our holdings. Subsequently, energy exposure was up over 11% and our medical distributors were up over 13% in January.
During the month, oil prices bounced back on more favorable supply and demand dynamics, among other factors, after an enormously difficult fourth quarter. As we’ve previously highlighted, the energy stocks we hold have passed thorough fundamental screens (as have all the names in our eligible universe), hold solid balance sheets, generate meaningful free cash flow (FCF) and are attractively priced based on our complex yield-based modeling. With all of this in mind, and an ability to be profitable even in lower oil price scenarios, we have a lot of confidence in their long-term upside regardless of the short-term energy environment.
We talked during the webinar and in last month’s letter about Suncor’s (SU) low unit (per barrel) operating costs and significant shareholder focus. Their strong FCF generation is in part a result of a well-integrated business, with downstream marketing and refining providing a balance to upstream exploration and production. Suncor was up over 15% for the month. Another stock we hold, Cabot Oil & Gas (COG), is an exploration and production company primarily focused on natural gas, with an ability to generate positive FCF (and high FCF yields) even at low gas prices. COG’s Marcellus Shale assets in Pennsylvania are considered among the most, if not the most, attractive gas assets in U.S. shale. Given COG’s balance sheet flexibility and management’s comments around returning a minimum of 50% of FCF to shareholders, we view our thesis as strong and very much intact. After COG was up more than 13% in January, we still have a price target of +64% from current levels.
The “big 3” medical distributors we own (controlling around 90% of their market)—AmerisourceBergen (ABC), McKesson (MCK) and Cardinal Health (CAH)—continue to deal with often misleading and/or exaggerated news on a variety of topics. These topics include Amazon’s potential interest in broadly entering the medical distribution market, potential opioid liabilities and pharmaceutical price controls. In January, however, the markets finally seemed to understand the extent to which potential headwinds are already priced into these companies’ stock prices. In fact, ABC was up over 6% on the last day of January based on its earnings report. The move higher came despite management lowering the high end of FY2019 EPS guidance and the continued uncertainty around the timing of reopening a drug compounding manufacturing facility. From a big-picture value perspective, however, ABC’s core pharmaceutical segment showed margin and cash flow growth during the quarter, with stabilizing generic and branded drug pricing a significant positive moving forward.
With eight portfolio moves in the last few weeks of December, we felt comfortably positioned moving into January. While we made no portfolio changes during the month, our dynamic valuation process consistently and objectively leads us into areas of value, regardless of the direction of the broader market indexes. As always, we remain opportunistic with an underlying focus on risk management. One of our favorite holiday cards this year came from a private equity firm. The card reads, “Searching for Gold…. In Mountains of Iron Pyrite” (also known as “fool’s gold”). We understand that notion very well as it is consistent with what we do daily. Most frequently we are looking at industries and equities that are attractively valued based on our valuation process but out of favor and misunderstood more broadly. At the same time, other investors are looking at what we see as the “iron pyrite” stocks, flash but little else. That’s just fine with us. As we’ve seen historically since our start in 2002, it allows us the opportunity for attractive entry points and to realize significant value over time.
We pride ourselves on being accessible to our clients, so please don’t hesitate to let us know if you have questions or would like to talk in more detail about the Day Hagan Logix Tactical Dividend strategy and portfolio. If you aren’t already on our email distribution list for monthly letters, trade notifications or notice of upcoming events, you can register anytime at https://dayhagan.com/subscribe/.
Thank you for your continued interest and support.
Robert Herman, MBA
Donald L. Hagan, CFA
Jeffrey Palmer, CIPM
Arthur S. Day
Steve Zimmerman, MBA
Print Copy of Article: Day Hagan Logix Tactical Dividend Strategy Update February 2019 (PDF)
Day Hagan Logix is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Day Hagan Logix claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Day Hagan Logix has been independently verified for the periods April 30, 2002 through December 31, 2017. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. Calculation Methodology: Pure gross of fees returns are calculated gross of management, custodial fees and transaction costs and are shown as supplemental information. Net of fees returns are calculated net of actual management fees, transaction costs and gross of custodian (trust) fees. Net of fees returns for wrap accounts are calculated net of management fees, transaction costs and all administrative fees charged directly to the client by the broker-dealer. Net return for the strategy for January, 2019 is +6.48%.
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: *Note that individuals’ percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Logix (DH Logix), 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 DH Logix 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. DH Logix, accounts that DH Logix 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. The performance of DH Logix’s past recommendations is 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.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.