Day Hagan Smart Core Equity Strategy Update October 2026
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Day Hagan Smart Core Equity Strategy Update October 2026 (pdf)
Summary
The DH Smart Value Portfolio seeks companies that can earn more than their cost of capital, convert those earnings into cash, and trade at prices that leave room for a margin of safety. That combination—economic profitability, balance-sheet strength, durable cash flow, and valuation discipline—is especially useful when markets are rewarding both innovation and financial discipline.
Strategy Update
Growth is part of the value equation
We want the companies we own to grow. We also want to be careful about what we pay for that growth. A business that can increase cash flow, reinvest profitably and strengthen its competitive position can be a very good value investment, even when its industry is usually described as “growth.” The challenge is separating a temporary loss of investor confidence from a lasting loss of earning power.
September made that distinction particularly clear. The S&P 500 index declined approximately -0.45%, the equal-weighted S&P 500 was down -4.81%, while the Nasdaq Composite gained about +1.9%. Rising bond yields put pressure on the broader market, yet the strength of a few large technology companies concealed substantial weakness elsewhere. A calm-looking index did not mean a positive month for most stocks.
A company creates economic value when it earns more on the capital it invests than that capital costs. Growth helps when those economics are favorable. Growth can destroy value when a company spends heavily to win business that never earns an adequate return. That is why we look beyond the sales headline to margins, cash generation, debt and the amount of capital required to support the next dollar of revenue.
The practical advantages can accumulate. A business that funds its own investment is less dependent on lenders. A strong balance sheet gives management choices during a downturn. Recurring customer relationships can reduce the cost of winning the same revenue again. When those advantages translate into more cash per share, shareholders can benefit without needing the stock’s valuation multiple to rise.
There is historical support for this approach. Research by Clifford Asness, Andrea Frazzini and Lasse Pedersen (published 11/2018) found that a strategy buying high-quality stocks and shorting low-quality stocks produced positive historical risk-adjusted returns across the U.S. and 24 other countries. It supports treating profitability, growth and financial strength as measurable investment characteristics. It does not make quality a guarantee or justify any purchase price.
How that translates into the holdings
Technology accounts for ~28.8% of the portfolio. Enterprise customers still have practical reasons to invest in software, including automating service requests, organizing customer information and reducing the time employees spend on repetitive tasks. ServiceNow provides evidence that this spending continues. Second-quarter subscription revenue increased 24.5%, and contracted revenue expected over the following 12 months grew 21% to $13.2 billion. The company also completed 123 transactions exceeding $1 million in net new annual contract value, nearly 40% more than a year earlier. These are meaningful commitments from customers, although they do not by themselves establish the return customers earn on that spending. Salesforce’s contracted revenue expected within 12 months increased 14% to $33.5 billion. Its revenue rose 11%, although $456 million came from Informatica, so we should not treat all that growth as organic. Adobe supplies another important confirmation. Its fiscal third quarter generated $2.52 billion of operating cash flow, demonstrating that its business is producing cash while the industry adjusts to AI. The investment question is how much of that cash ultimately benefits shareholders. For example, automating work could help a software company sell additional capabilities, but it could also reduce the number of employee licenses a customer needs. We therefore watch contract growth alongside cash generation, stock compensation and the cost of developing and delivering new products. Growth matters to our value approach, but so does what shareholders must spend to obtain it.
Financials represent ~15.1% of the portfolio, with earnings tied to several different revenue streams. BNY illustrates the combination of recurring financial services and expense discipline. Second-quarter revenue increased 13%, while expenses rose 7%. That difference helped lift its pretax operating margin to 39.8% from 36.6% and diluted earnings per share by 27%. This is a concrete example of why we pay attention to operating efficiency. A business that grows revenue faster than costs can produce considerably faster earnings growth. Visa gives us a different exposure. In its June quarter, payments volume increased 10% and cross-border volume excluding transactions within Europe increased 12%, both measured in constant dollars. Those figures connect its growth to purchases and international commerce. JPMorgan and Goldman Sachs add lending, underwriting, advisory and trading businesses. A company issuing bonds or completing an acquisition can generate fees even when the outlook for lending margins is mixed. Berkshire adds insurance and operating businesses, while alternative asset managers earn management fees and, when investments perform and contractual conditions are met, performance-related income. Higher loan yields help only if funding costs and credit losses remain manageable. Successful fundraising supports future management fees, while selling investments can return capital to clients and support subsequent fundraising. We want several sources of earnings growth, with company-specific evidence behind each holding.
Real estate and utilities together represent ~12.4% of the portfolio. The attraction is the opportunity to grow income from properties and essential infrastructure, provided financing costs do not consume the gains. NNN REIT offers a useful example. At June 30, occupancy was 99.1%, its remaining lease term averaged 10.1 years, and second-quarter adjusted funds from operations, or AFFO, increased 5.9% per share. Its quarterly dividend represented 67% of AFFO, leaving a portion of that earnings measure available beyond the dividend. (AFFO is a non-GAAP measure and is not identical to cash flow.) Realty Income reported 3.8% AFFO-per-share growth and a 7.3% initial weighted average cash yield on its share of new investments. That acquisition yield is a starting point, not the shareholder’s return. Debt costs, equity funding, overhead and tenant performance still determine whether an acquisition adds value per share. The same discipline applies to VICI. For apartments, we watch whether rent increases survive concessions and turnover costs. For towers, additional tenant revenue must be weighed against construction spending and cancellations. Utilities provide another direct example. OG&E’s second-quarter earnings contribution rose to $0.58 per share from $0.53, helped by recovery of capital investments and lower interest expense, partly offset by higher operating costs. That shows why regulatory cost recovery matters as much as the amount a utility invests.
Health care represents ~10.2% of the portfolio through Merck, Bristol Myers Squibb and Novo Nordisk. Their businesses address cancer, cardiovascular disease, diabetes, obesity and other medical needs, giving us demand drivers that differ from discretionary consumer spending. Merck’s second-quarter WINREVAIR sales increased 75% to $588 million, providing a tangible example of a newer treatment contributing to growth. The question is whether newer products can become large enough to offset future pressure on established franchises. Bristol Myers is a good example. Its Growth Portfolio generated approximately $7.6 billion of second-quarter revenue, up 15%, compared with 6% growth for the company overall. Management identified Opdivo Qvantig, Reblozyl, Camzyos, Breyanzi and Opdualag as principal contributors. That gives us actual sales to evaluate when assessing the company’s ability to replace revenue exposed to patent losses. Novo Nordisk demonstrates both the opportunity and the risk. Second-quarter adjusted sales increased 7% at constant exchange rates, supported by GLP-1 volume growth and favorable U.S. rebate adjustments. Yet reported operating profit fell 16% on the same currency basis, affected by a prior-year rebate reversal and DKK 6.3 billion of pipeline-related impairment charges. Its ZEUS cardiovascular trial also failed to meet its primary endpoint. These examples explain our emphasis on the purchase price and existing earnings power. We want growing products and credible development programs, while allowing for the possibility that individual trials disappoint, competitors gain share or pricing weakens.
What the earnings reports actually tell us
As of September 30th, the main reporting season for the calendar third quarter was still ahead. Adobe had reported its fiscal third quarter, which ended August 28. Campbell’s had reported its fiscal fourth quarter, which ended August 2. Salesforce’s latest report covered its fiscal second quarter ended July 31. These are the latest relevant reports discussed here, not three reports for the calendar quarter ended September 30.
FactSet’s September 25th “Earnings Insight” estimated S&P 500 third-quarter earnings growth of 29.1% and revenue growth of 12.1%. The earnings estimate had increased from 26.7% at June 30, but revisions were uneven. Materials, Consumer Staples and Health Care were among the sectors with downward dollar-level earnings revisions.
Adobe and the importance of the share count
Adobe reported revenue of $6.76 billion, up 13%, and operating cash flow of $2.52 billion. GAAP diluted earnings per share rose to $4.62 from $4.18. Here is an easily overlooked detail. Net income increased approximately 3.1%, while diluted EPS rose about 10.5%, helped by a reduction in average diluted shares from 424 million to 395 million.
That is a concrete example of growth in the shareholder’s interest exceeding growth in total company profit. Repurchases can improve per-share results, although the price paid and stock compensation matter. Meanwhile, Adobe’s September share-price decline shows that growing current earnings did not resolve investors’ concerns about its future. We continue to distinguish cash generation today from the risk that AI changes customer behavior tomorrow.
Salesforce and the quality of growth
Salesforce’s latest report showed revenue of $11.3 billion, up 11%, and current remaining performance obligations of $33.5 billion, up 14%. Free cash flow was $1.1 billion. The obligations measure provides evidence of contracted business expected to become revenue over the next year.
There is an important qualification. Revenue included $456 million from Informatica. We should not describe all reported growth as organic. Similarly, the company’s full-year free-cash-flow growth guidance of approximately 4%–5% was much lower than the latest quarter’s 81% increase. That is why we evaluate the annual cash trajectory and acquisition economics alongside a strong quarterly report.
Campbell’s and the limits of a familiar brand
Campbell’s reported a 1% decline in organic sales and a 25% decline in adjusted operating profit. Adjusted EPS fell 37% to $0.39, with the comparison partly affected by an extra week in the prior year. The company also reset its dividend to accelerate debt reduction and targeted $500 million in cost savings by fiscal 2030.
At 1.07% of the supplied allocation, this is a small position with a clear burden of proof. Cost savings need to improve cash generation while the brands retain customers. A lower dividend may help the balance sheet, but it is also a warning that the previous payout competed with other needs. Our value discipline requires us to acknowledge that evidence, even when it makes the story less comfortable.
The September portfolio decision
The September allocation eliminated Lululemon (see our earlier Trade Notification) and increased the Treasury-bill ETF BIL. The resulting allocation is ~14.03% in BIL.
The practical effect is clear. The portfolio has less direct exposure to discretionary apparel spending and more liquid capital available for future purchases. Treasury bills can earn income while we evaluate opportunities. Their short maturities limit sensitivity to changing yields, although the ETF’s price can fluctuate and future income will change as its holdings roll over.
What would change our assessment
For the technology holdings, we want bookings and renewals to support the growth outlook without a disproportionate increase in selling costs. For health care, product demand and pipeline progress must compensate for competitive and patent risks. For real estate, rent growth and investment returns must exceed the drag from financing costs. At the company level, deteriorating cash generation or balance-sheet strength can outweigh an apparently attractive multiple.
Liquidity has an opportunity cost when stocks rise. We weigh that cost against the flexibility to purchase businesses at prices that offer better compensation for risk.
If you have any questions or would like to discuss the portfolio in more detail, please do not hesitate to contact us directly.
Sincerely,
Donald L. Hagan, CFA®
Regan Teague, CFA®, CFP®
Disclosure: The aforementioned positions may change at any time.
Disclosure: *Note that individuals’ percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. Returns are based on a representative account. The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. All investments involve risk, including the possible risk of loss.
This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
Data and analysis are provided “as is” without warranty of any kind, either express or implied. Day Hagan Asset Management, its affiliates, employees, or third-party data providers shall not be liable for any loss sustained by any person relying on this information. All opinions and views expressed are subject to change without notice and may differ from those of other investment professionals within Day Hagan Asset Management or Ashton Thomas Private Wealth, LLC.
Accounts managed by Day Hagan Asset Management or its affiliates may hold positions in the securities discussed and may trade such securities without notice.
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Definitions:
Adjusted EPS / EPS without NRI: Earnings per share excluding non-recurring items. This metric is often used to evaluate a company’s underlying profitability by removing unusual gains, losses, or one-time expenses.
AI Infrastructure: The technology hardware, software, networking, data-center capacity, cloud resources, and power systems needed to support artificial intelligence workloads.
Balance-Sheet Quality A measure of a company’s financial strength, including cash levels, debt burden, liquidity, and ability to fund operations through different market environments.
Cash Flow Generation: A company’s ability to produce cash from its business operations after funding expenses and investment needs.
Cash / T-Bills: Portfolio holdings in cash or short-term U.S. Treasury bills. These positions typically provide liquidity, lower volatility, and income tied to short-term interest rates.
Cloud Infrastructure: The servers, data centers, networking equipment, and software platforms that allow companies to store, process, and access data and applications remotely.
Commodity Sensitivity: The degree to which a company’s earnings, cash flow, or stock price is affected by changes in commodity prices, such as oil or natural gas.
Defensive Ballast: Portfolio holdings that may help reduce volatility or provide stability during weaker equity markets, often including cash, utilities, consumer staples, health care, or high-quality dividend-paying companies.
Digital Workflow Solutions: Software platforms that automate, organize, and improve business processes across departments such as IT, security, operations, finance, and human resources.
Earnings Surprise: The difference between reported earnings and analysts’ expectations. A positive earnings surprise occurs when reported earnings exceed consensus estimates.
Enterprise IT Modernization: The process by which companies upgrade technology systems, including software, cloud platforms, cybersecurity, networks, data centers, and computing infrastructure.
EVA / Economic Value Added: A measure of whether a company is generating returns above its cost of capital. Positive EVA suggests the company is creating economic value for shareholders.
Factor Sensitivity: A portfolio’s exposure to common investment characteristics, such as growth, value, quality, momentum, size, dividend yield, or interest-rate sensitivity.
Free Cash Flow Per Share: Free cash flow divided by shares outstanding. It shows how much cash a company generates for each share after capital spending.
Growth-Oriented Companies: Companies expected to grow revenue, earnings, or cash flow faster than the broader market. These businesses often trade at higher valuation multiples.
Large-Cap Stability: Exposure to larger, more established companies that may have stronger balance sheets, broader revenue sources, and greater access to capital.
Operating Leverage: The ability of a company to grow earnings faster than revenue as fixed costs are spread across a larger revenue base.
Per-Share Fundamentals: Financial metrics expressed on a per-share basis, such as revenue per share, earnings per share, free cash flow per share, or book value per share. These measures help evaluate whether shareholder economics have improved over time.
Price-to-Cash-Flow: A valuation ratio comparing a company’s stock price to its cash flow per share. Lower ratios may suggest a more attractive valuation, depending on business quality and growth prospects.
Quality / Value Discipline: An investment approach that emphasizes financially sound companies trading at reasonable valuations, with attention to earnings durability, cash flow, balance-sheet strength, and risk.
Rate Sensitivity: The degree to which a stock, sector, or portfolio may be affected by changes in interest rates. REITs, utilities, and dividend-oriented stocks often have meaningful rate sensitivity.
Revenue Per Share: Total company revenue divided by shares outstanding. It helps measure how much revenue is generated for each share owned.
Risk/Reward Profile: The balance between potential return and potential downside risk. A more attractive risk/reward profile suggests that expected upside appears favorable relative to possible losses.
Run-Rate Operational Improvement: Estimated recurring cost savings or efficiency gains expected to continue over time once fully implemented.
Sector Allocation: The percentage of a portfolio invested in each economic sector, such as Information Technology, Financials, Health Care, Energy, Real Estate, or Consumer Staples.
Share Repurchases / Buybacks: When a company buys back its own shares, which can reduce shares outstanding and improve per-share metrics over time.
TTM / Trailing Twelve Months: Financial results from the most recent 12-month period. TTM data is often used to compare current fundamentals with prior fiscal-year results.
Valuation Multiple: A ratio used to compare a company’s market value with financial metrics such as earnings, cash flow, revenue, or EBITDA.
Value-Oriented Managers: Investment managers who focus on companies trading at prices they believe are reasonable or discounted relative to fundamentals such as earnings, cash flow, assets, or long-term value.
Year-over-Year Earnings Growth: The percentage change in earnings compared with the same period one year earlier.