DAY HAGAN LOGIX TACTICAL DIVIDEND STRATEGY UPDATE MAY 2, 2019
In April, the Day Hagan Logix Tactical Dividend Strategy (DHLTD) returned +3.10%*, with the benchmark Russell 1000 Value +3.55% for the month. Going into May, the portfolio stands at its highest level of cash (nearly 24%) during the year to date. The significant cash holding currently in the DHLTD portfolio reflects what our objective, “weight-of-the-evidence” approach is telling us: our overall eligible universe of industries and equities is meaningfully overvalued, and while we believe our invested portfolio has compelling risk-return characteristics, not enough stocks meet our stringent criteria for purchase. For the year to date, DHLTD is now +13.14%* while holding levels of defensive cash throughout. All numbers are gross of fees and total return.
From a macro market and risk mitigation perspective, we do note a few things. First, the longest expansionary period in U.S. history is 120 months (1991-2001) since records, starting in 1854, have been maintained. In June of this year, that record is set to be tied. Second, by traditional P/E ratio measures, the valuation gap (chasm?) between value and growth stocks, with value lagging, is the largest it has been in an estimated 70 years. Utilizing our consistent valuation process, we believe our current cash position is prudent in protecting downside while we continue to generate attractive, absolute returns with the deep value stocks owned in the portfolio.
It was an active month for our typically low portfolio turnover strategy. Early in the month we purchased Ross Stores (ROST) and Designer Brands (DBI) within our specialty retail industry grouping. At the same time, we sold Tractor Supply (TSCO) for a total return of about 66%* over a 17-month period. We also sold Qualcomm (QCOM) for a total return of around 60%* over an 18-month period, as it hit our price target after the settlement of a major royalty dispute with Apple. Finally, we sold our last remaining technology portfolio name, InterDigital (IDCC), after the sale of QCOM in the same industry grouping (communications & networking), as the industry had moved away from a buy signal.
In the context of our ROST and DBI purchases in April, we continue to find idiosyncratic opportunities in the retail space with stocks we view as having significant upside and measured risk. Ross Stores (ROST) is a leading off-price retailer, heavily insulated from Amazon, with comparable prices as much as 70% below online or declining brick-and-mortar retailers. Even with those types of discounts, ROST has among the highest margins in retail, a reflection of their best-in-class supply chain with opportunistic purchasing and rapid inventory turns. As is always a prerequisite for names we hold in the DHLTD portfolio, ROST has a strong balance sheet with modest debt (<9% long-term debt/total capital), a meaningful cash position and attractive free cash flow characteristics (free cash flow dividend payout ratio of just over 20%).
Designer Brands (DBI) is more commonly known as discount shoe retailer DSW. DBI accounts for about 5% of all shoe transactions in North America, including its own—over 500—retail stores while operating shoe departments for others, including Stein Mart. The company’s recent ticker change from DSW to DBI reflects a growing focus on building its own shoe brands in conjunction with its retail presence. DBI’s acquisition of Camuto Group operations late last year enhances its design, sourcing and production infrastructure to further extend its private brand portfolio. Optimizing the private brand portfolio should lead to the realization of significant margin upside for DBI starting this calendar year. DBI has a large and loyal customer base: 26 million members with attractive demographics ($75,000-$100,000 average income). Similar to ROST, DBI continues to show a healthy balance sheet with modest leverage and the capacity to keep growing its dividend (20% increase in 2018).
Currently, our energy exposure in the DHLTD portfolio is close to 14%, versus 10.5% at the start of the year. Based on our process, this reflects what we view as compelling value in the sector and, more specifically, the equities we hold. Even after our energy holdings have been up over 16%* year to date (including EOG up nearly 9%* since our mid-March purchase), our average price targets still show projected upside of around 70%. From a broader, macro point of view, the continued disconnect between the price of oil (Brent Crude up about 34% year to date) and energy stocks is hard to justify. These energy stocks overall are still meaningfully off of their pre-selloff levels in October 2018, while the price of oil has recovered. This decoupling has been even more pronounced post-January, with January representing most of energy stock price gains for the year thus far. For further context, currently the energy sector is trading at its lowest valuation in decades based on traditional measures like price/book (exploration & production companies are now trading at as much as 30% below book value). We do believe this low stock price elasticity to rising oil prices will correct itself given current industry and company fundamentals. What’s more, based on the DHLTD valuation criteria, we see our diverse energy holdings having attractive strategic upside regardless of near-term noise and oil price volatility.
We welcome your feedback and questions on the DHLTD strategy and portfolio anytime.
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 May 2019 (PDF)
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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. The S&P 500® Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.
Alpha is a statistical measure that calculates an active manager’s return in excess of a benchmark index or a “risk-free” investment.
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. DH Logix uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of DH Logix’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.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.