Day Hagan Smart Value Strategy Update April 2025
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Summary
The DH Smart Value Portfolio continues to invest in companies producing excess returns through positive economic profitability, supported by solid balance sheets (quality), significant cash generation (profitability), and trading with considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.
Strategy Update
We typically write this update to discuss what happened during the previous month, and how those factors impacted our portfolio holdings and future expectations. However, given the extreme market volatility during the first week of April, we thought it would be more useful to focus on the latest news, specifically tariffs. Clearly, the situation is bound to ebb and flow. At this stage, we are managing our accounts with an eye toward defense until visibility improves.
To be clear, as of this writing, the S&P 500 has just returned its worst two-day performance (last Thursday and Friday) since the start of the COVID-19 crisis. The index is now hovering between levels seen during the May 2024 lows and the August 2024 lows, which followed declines of 5.4% and 8.5%, respectively. In other words, equities have given up the past eight months of gains due to the tariff announcements appearing significantly more punitive than the Street envisioned. Below are our current thoughts based on information available from several Wall Street analysts and research organizations we monitor (sources: Day Hagan Research, Goldman Sachs Research, J.P. Morgan Research, 3Fourteen Research, WSJ, Raymond James Research, St. Louis Fed):
The recent tariff announcement exemplified the worst-case scenarios anticipated by the market. Key points include a baseline global tariff of 10%, effective last Friday, alongside country-specific tariffs that will take effect on April 9. Countries will be subject to the greater of either 50% of their reciprocal tariff levels or the 10% baseline. Additionally, sectoral tariffs may be layered on top of these country-specific tariffs. Notably, the semiconductor and pharmaceutical sectors have yet to see specific announcements.
Tariff Details: 1. A global baseline tariff of 10%, effective last Friday. 2. Country-specific reciprocal tariffs (e.g., China at 34% (more on this in a moment), EU at 20%, India at 26%). 3. An automobile tariff set at 25%. 4. A declaration of a national emergency concerning trade deficits. 5. For Canada and Mexico: compliant goods under USMCA maintain a 0% tariff; other goods face 25% tariffs, while energy and potash products are subject to a 10% tariff. 6. Existing tariffs on steel and aluminum remain unaffected, set at 25%. 7. No additional sectoral tariffs were introduced at this time, but escalation is possible, particularly in sectors like lumber and semiconductors.
Winners and Losers: On the country level, prominent losers include China, initially facing a cumulative tariff rate of 54%, which already exceeded market expectations. Other affected countries include Vietnam (reportedly, Vietnam has already agreed to reduce its tariffs), Taiwan, Japan, and the EU.
The exclusion of Canada and Mexico, along with the 10% tariffs on countries such as Brazil, Australia, the UK, and UAE, is initially seen as a positive development. In terms of sector impact, companies with significant exposure to high-tariff countries experienced substantial declines in stock prices. The semiconductor sector also suffered, amid concerns over rising tariffs on Taiwan and potential tariffs on chips.
What Next? The primary focus now shifts to potential retaliatory actions from affected countries. Before the announcement, Chinese state media indicated they would seek to coordinate a collaborative response from China, Japan, and South Korea. This was concerning. Furthermore, and unfortunately, China then reacted by increasing the tariffs on U.S. goods. In response to that response, President Trump’s team again increased tariffs on China by an additional 10%. This ultimately had the effect of igniting Friday’s extensive market decline.
Possibility of De-escalation: While the latest tariffs were set at higher-than-expected levels, options for negotiation remain. An off-ramp could include a blanket tariff of 10-15% without reciprocity. Going forward, negotiations or retaliatory measures from various countries will influence the course of trade relations, and the most effective off-ramp might involve new trade agreements.
Equity Market Response: Risk off. The S&P 500 had its worst 2-day return since the March 2020 pandemic lows. $5 trillion in market value was lost, potentially affecting consumer confidence and spending plans. From a quantitative standpoint, based on our models and indicators, selling has been widespread, and several measures evaluating “panic selling,” “selling exhaustion,” and “excessive pessimism” are now at levels where declines have historically stalled or reversed, as long as there wasn’t a recession within the next 12 months. And this is where it gets dicey: If the tariff pressures don’t start to alleviate soon, the probability of a global recession will continue to rise. But other countries know that a dislocation of global trade is bad for everybody.
While it has only been five days since “Liberation Day” (the April 2 announcement of the tariffs), several countries are already negotiating to reduce tensions. Vietnam has expressed their intent to eliminate all import tariffs on U.S. goods (LULU, TGT, and NKE spiked on the news, as a large part of their production line resides there—this is a good corollary for what could happen with other regions and equity sectors), the EU proposed lowering car tariffs and increasing purchases of U.S. energy and military equipment (good news), Japan has pledged to import more liquefied natural gas and invest in AI sectors, South Korea has announced intentions to find common ground and not escalate, India has offered to reduce or eliminate tariffs on over half of its imports from the U.S. contingent upon relief from the new tariffs, and of course, as mentioned earlier, Mexico and Canada were spared from the new tariffs (the U.S.’s two largest trading partners, with total trade in 2024 totaling $839.9B and $762.1B, respectively). Taiwan has stated it will not impose reciprocal tariffs and is already negotiating tariff-free agreements with the U.S., similar to the USMCA (U.S.-Mexico-Canada Agreement).
The top 10 trading partners with the U.S. (from largest to smallest based on 2024 total trade volume results) are: Mexico ($839.9B), Canada ($762.1B), China ($582.4B), Japan ($227.9B), Germany ($236B), South Korea ($197B), United Kingdom ($148B), Vietnam ($158B), India ($103.4B), and Taiwan ($149.7B). The good news is that only China is playing hardball at this point. To be clear, as more countries seek and attain “freer” trade agreements, equities will respond positively. Should the pendulum swing in the other direction, our view is that recession fears will grow and equities will suffer. Nonetheless, at this point, it appears that the announced tariff levels were likely near the “high water mark” and most of the bad news is priced in. Nonetheless, we aren’t dismissing the possibility that markets could head lower and will adjust accordingly.
Fixed Income Market Response: From a market perspective, the implications are stark should the announced tariffs stand. The estimated effective tariff rate now stands at approximately 24%, exceeding the previously feared worst-case scenario of 20%. Economists have adjusted their projections, estimating a 0.9% positive impact on core CPI from tariffs and a downward revision of 0.6% in GDP growth (there are many estimates out there, but these levels appear logical). Consequently, while there is apprehension about chasing current market movements, the expectation is for continued lower Treasury yields in the near term, especially if risk assets continue to decline. Lower rates would provide a positive underpinning. Think of it as the bond market doing the Fed’s job.
Long-term Economic Implications: The most important question going forward is “Is this the peak for U.S. tariff levels?” We suspect that it is very close, meaning that, potentially, most of the bad news related to the U.S. enacting tariffs and the levels is out. That implies that the market is primed for good news should countries acquiesce and begin to lower their tariffs on U.S. goods and services.
When the news came out on April 2 (Thursday), we noted at the time that equities, while down significantly, performed better than we would have expected given the magnitude and “shock value” of the announced actions. It wasn’t until China retaliated that the decline of the equity market accelerated. This epitomizes the binary outcomes expected relative to “tariff retaliation” versus “coming to the table.” It’s important to recognize that over the past three weeks, prior to the announcements, equity markets have spiked higher each time a major trading partner has announced that they will work with the U.S. to lower barriers to trade. We are monitoring these developments closely.
Several outlets suggest that further escalation is possible, as numerous countries are reportedly actively discussing retaliatory tariffs. However, we’ve heard this before, and so far, other countries have relented. President Trump retains the authority to enhance tariffs in response to international retaliation, which is both a wildcard and a deterrent to escalation.
In conclusion, while there are avenues for mitigation and potential trade deals on the horizon, the likelihood of further escalation remains a significant concern for both markets and economies globally. At this point, the market has digested quite a bit of bad news and uncertainty. We continue to think defensively at this juncture. However, if our trading partners begin to lower barriers, markets should rebound accordingly.
Turning to the portfolio, we maintained a cash cushion in April. On Friday morning, we exited several stocks we viewed as having potentially heightened risk from continued tariff escalation (Terex, PayPal, and Nike). We also trimmed J.P. Morgan due to the position becoming outsized and at risk from a slowing economic backdrop. A portion of the proceeds was used to initiate positions in Berkshire Hathaway (BRK.B) and J.M. Smucker Company (SJM), both of which we view as defensive holdings. The remainder will be held in cash and will be deployed as more opportunities become available.
Here are the details from our 4-4-2025 Trade Notification:
SALES: Terex (TEX), PayPal (PYPL), Nike (NKE)
As of April 4, 2025, Terex, PayPal, and Nike faced significant stock price risks due to escalating tariffs under the Trump administration. These companies, each in distinct sectors, are vulnerable to trade policies disrupting their operations and profitability.
Terex, a global heavy machinery manufacturer, relies on international supply chains and exports. Tariffs on steel, components, or finished goods from key markets like China or Vietnam—now facing 54% and 46% duties, respectively—could inflate costs and squeeze margins. Demand may also falter if trading partners retaliate, hitting Terex’s revenue.
PayPal, a digital payment giant, isn’t directly tied to physical goods but isn’t immune. Tariffs could dampen global e-commerce, a core driver of PayPal’s transaction volume. Higher consumer prices from tariffs on countries like Vietnam or Indonesia (32% duties) might reduce online spending, slowing PayPal’s growth and pressuring its stock. We also have concerns around the continued deterioration in lower-income households, formerly a sweet spot for PayPal’s revenue growth.
Nike, heavily dependent on Asian manufacturing, faces the starkest threat. With Vietnam producing half its footwear and now hit by a 46% tariff, alongside China’s 54% total levy, production costs could soar. Passing these to consumers risks demand, while absorbing them erodes profits, making Nike’s stock a tariff casualty. We are using this morning’s rally in the stock (due to Vietnam expressing an interest in reducing tariffs) to exit the position and move into more defensive holdings.
TRIM: J.P. Morgan (JPM)
We trimmed JPM as we repositioned the overweight holding to limit individual company risk. We still see value in the holding; however, geopolitical volatility and concerns that M&A activity, as well as debt and equity issuance, may stall in the near-term due to the extreme levels of uncertainty and plummeting business and consumer confidence.
PURCHASE: Berkshire Hathaway (BRK.B) and J.M. Smucker (SJM)
Berkshire Hathaway. Its mix of defensive businesses (insurance, utilities) and cash hoard cushions it against trade war fallout. Unlike pure manufacturers or retailers, BRK.B’s insurance and energy segments are less tariff-sensitive, and its U.S.-centric operations (e.g., BNSF, GEICO) limit overseas exposure. Buffett’s aversion to overvalued stocks—he’s been a net seller—positions BRK.B to capitalize on market dips. BRK.B isn’t immune to tariffs, but its diversified portfolio and massive cash reserves make it less vulnerable than many peers. We view it as a compelling buy given its relative stability amid tariff uncertainty, with upside potential if Buffett leverages a downturn.
Berkshire Hathaway’s expected economic profitability expectations are within historical ranges, sales and profitability trends are positive, cash margins continue to expand, and SG&A (selling, general, and administrative) costs have been reduced.
J.M. Smucker. SJM operates in the consumer staples sector, producing well-known brands like Folgers coffee, Jif peanut butter, Smucker’s spreads, and Uncrustables. These are everyday essentials with steady demand, even in economic downturns. Amid tariff-induced market volatility, SJM’s defensive nature offers a buffer.
SJM’s latest earnings (reported February 25, 2025, for the quarter ending January 31) showed adjusted EPS of $2.61, beating estimates of $2.37, with net sales of $2.23 billion slightly above the $2.21 billion expected. Uncrustables and pet foods (e.g., Meow Mix, Milk-Bone) drove growth, up 11% and 8%, respectively, offsetting coffee segment weakness. This resilience suggests operational strength despite macro pressures.
SJM generated $1.2 billion in operating cash flow in 2024, supporting debt reduction (net debt at $7.8 billion) and modest share repurchases. With coffee prices stabilizing, margins could improve, freeing capital for shareholder returns.
Higher tariffs on unrelated goods (e.g., apparel, electronics) could reduce consumer spending power, nudging cost-conscious buyers toward cheaper private-label alternatives over SJM’s premium brands. However, staples like peanut butter and coffee tend to retain loyalty.
Only 10-15% of SJM’s sales are international (primarily Canada), minimizing retaliation risks from trading partners.
Expectations for SJM’s economic profitability are at the low end of the 10-year range, indicating that investors are rationally pricing SJM’s prospects. Gross margins are increasing, profitability is good, and a forward price/earnings ratio of just 11.8x is appealing.
Turning to equity sectors for a moment, our largest sector allocations are Financials, Information Technology, Communication Services, and Industrials. Our target weightings versus the Russell 1000 Value Index are as follows: Information Technology 11.6% vs. 8.3% benchmark, Healthcare 1.3% vs. 15.2%, Financials 14.9% vs. 22.6%, Consumer Discretionary 6.1% vs. 5.9%, Communication Services 13.1% vs. 4.6%, Industrials 7.0% vs. 13.9%, Consumer Staples 7.6% vs. 8.6%, Energy 6.2% vs. 6.6%, Utilities 4.7% vs. 5.0%, Materials 4.0% vs. 4.2% and Real Estate 6.3% vs. 4.8%.
The Smart Value portfolio strategy utilizes measures of economic profitability, balance sheet sustainability, cash flow generation, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational decisions about how much capital to put at risk and where to put that capital.
Please let us know if you want to discuss the portfolio in more detail or learn more about our approach.
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 data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, 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. Day Hagan Asset Management accounts that Day Hagan Asset Management 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. Day Hagan Asset Management 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 Day Hagan Asset Management’s past recommendations and model results 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.
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Toll-Free: (800) 594-7930 | Office Phone: (941) 330-1702
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