Day Hagan Smart Value Strategy Update January 2026
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Summary
The DH Smart Value Portfolio is designed to invest in companies that we believe have the potential to deliver excess returns through positive economic profitability, solid balance sheets (quality), meaningful cash generation (profitability), and trading at considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.
Strategy Update
December marked a distinct pivot in U.S. equity factors, characterized by a continued rotation away from mega-cap technology. Value strategies outperformed Growth for the second month in a row, based on the relative returns of the Russell 1000 Growth vs. Value indexes. December’s performance was further defined by a rotation into cyclical sectors rather than defensives. The Financials and Materials sectors emerged as relative leaders, buoyed by economic optimism, whereas interest-rate-sensitive sectors like Utilities and Real Estate lagged significantly, anchoring the bottom of the market. This proved beneficial for the portfolio's relative returns.
Blue Chip industrials and financials helped the Value indices outperform. Technology and the mega-cap growth cohort finished in the middle of the pack—serving as a stabilizing force rather than a drag—while market breadth actually narrowed. Ultimately, the month favored cyclical value over pure defensive strategies, with the broader market finishing flat to slightly lower as investors digested the year’s substantial gains.
Value stocks benefited as elevated growth valuations came under pressure in a less supportive macroeconomic environment. Investor appetite for speculative, momentum-driven growth names faded amid concerns about slowing global growth, rising recession risks, and heightened geopolitical and regulatory uncertainty. As a result, capital rotated toward lower-valuation, cash-generative sectors such as financials, energy, and other traditional value areas. Higher interest rates continued to weigh disproportionately on long-duration growth stocks, while persistent uncertainty increased the appeal of companies with strong balance sheets, stable earnings, and reliable dividends. These classic value characteristics drove value’s relative outperformance.
This dynamic was reminiscent of the first quarter of the year. The Russell 1000 Value Index outperformed the Growth Index in each of the first three months: in January, value returned 4.63% versus growth’s 1.98%; in February, value declined -1.82% compared with growth’s -5.70%; and in March, value fell -3.68% versus growth’s -7.41%. Factor analysis from the first quarter of 2025 shows positive contributions from value, yield, and quality factors, while pure growth, high-volatility, and momentum exposures weakened, particularly by March. This pattern reflects an early-2025 regime in which investors favored reasonably valued companies with strong balance sheets and consistent dividends over high-beta, speculative growth stocks.
What did it take for Value to outperform Growth so dramatically in Q1? It occurred due to a convergence of policy uncertainty and fiscal disruption following the inauguration of the new administration. An early-quarter government shutdown disrupted federal operations, delayed economic data releases, and postponed tax refunds, creating a temporary fiscal drag that weighed on consumer spending and sentiment. With key indicators unavailable, investors were effectively “flying blind,” amplifying anxiety about the true state of the economy. At the same time, markets struggled to price in a perceived shift in regulatory, fiscal, and trade priorities, particularly ahead of the anticipated “Liberation Day” tariffs announced in early April. This combination of fiscal paralysis and policy shock led to elevated volatility across equities and Treasuries, pressuring valuations and risk appetite. In short, the quarter was defined by uncertainty rather than deteriorating fundamentals, as markets reacted to political and policy dislocation rather than underlying economic weakness.
Additionally, DeepSeek, the Chinese artificial intelligence research firm, began appearing publicly with the release of its first language models. Its first major breakthrough came in November 2023 with the release of DeepSeek-Coder, an open-source coding model that gained traction among developers. The company reached global prominence on January 20, 2025, with the release of DeepSeek-R1, a reasoning-focused model and chatbot that attracted widespread attention and challenged perceptions of U.S. dominance in advanced AI, marking a watershed moment in the global AI landscape.
In short, elevated macro uncertainty, fading confidence in the near-term profitability of AI, and interest rates declining less than markets had anticipated combined to weigh heavily on growth stocks. We believe these forces are likely to persist and continue to generate volatility in the months ahead, strengthening the case for companies anchored by durable profitability, strong balance sheets, and reasonable valuations.
Looking ahead to 2026, several additional forces continue to tilt the balance toward value. These include attractive relative valuations, a broadening of earnings growth, evolving macroeconomic conditions, and shifting sentiment toward mega-cap technology and AI-related stocks. U.S. value indices remain meaningfully cheaper than their growth peers both historically and on a relative basis, offering greater scope for multiple expansion as earnings growth becomes more evenly distributed across sectors. Forecasts for 2026 point to more balanced earnings growth, which tends to favor cyclical and financial sectors that feature prominently in value benchmarks.
On the macroeconomic front, the Federal Reserve is expected to continue gradual rate cuts in 2026, though not to the ultra-low levels of the prior decade. Combined with moderate inflation and steady real GDP growth, this environment has historically supported broader market leadership rather than narrow, technology-driven rallies. Improved market breadth is also expected, with a wider range of sectors and smaller companies contributing to returns — another potential tailwind for value relative to large-cap growth.
After years of exceptional performance, the largest AI- and platform-focused technology stocks appear increasingly expensive, with more muted forward return expectations. While the long-term outlook for AI remains constructive, institutional investors are growing more cautious about concentration risk in the “Magnificent Seven” and the broader AI trade. Recent fund-flow trends suggest rising interest in value-oriented and broad-market strategies relative to growth-focused vehicles.
Historically, periods characterized by higher real interest rates, moderate but non-recessionary growth, and slightly above-target inflation have favored value-oriented factors such as financials, industrials, and select cyclicals. If rate cuts coincide with a re-acceleration and broadening of earnings growth, value sectors tied to credit creation, capital expenditure, and domestic demand — including banks, industrials, and selected defensive stocks — could enjoy a sustained multi-year tailwind relative to the most expensive segments of the growth universe.
On December 17, 2025, the portfolio rebalanced exposures by trimming Alphabet, increasing Accenture and Adobe, and initiating a position in Netflix. Alphabet was reduced following significant multiple expansion driven by AI enthusiasm, increased position size, rising competitive intensity in AI monetization, and ongoing regulatory risk, while maintaining a core holding. Accenture's valuation improved, its consulting model remained resilient, its balance sheet remained strong, and it led in enterprise AI and digital transformation. Adobe was added for its dominant software franchises, recurring revenue model, disciplined AI integration, normalized valuation, and strong free cash flow. Netflix was purchased for its improving margins and capital discipline, expanding monetization levers, global scale advantage, and attractive relative valuation, providing selective growth exposure with strengthening fundamentals.
The portfolio changes shifted the tenor toward higher-quality, stronger fundamentals, and a more balanced growth exposure, while reducing concentration risk. Trimming Alphabet lowered dependence on mega-cap, momentum-driven technology and reduced exposure to regulatory and valuation risk. Increasing Accenture's and Adobe's stakes reinforced the portfolio’s emphasis on durable franchises with recurring revenues, strong returns on capital, and resilient cash flows, enhancing stability and earnings visibility. Adding Netflix introduced a measured growth component, but one grounded in improving profitability, disciplined capital allocation, and multiple monetization levers rather than speculative expansion. Overall, the changes moved the portfolio more toward a more diversified blend of quality, value, and selective growth, improving risk-adjusted return potential while maintaining exposure to long-term secular trends such as AI, digital transformation, and global media consumption.
On December 29, 2025, the portfolio reallocated capital by exiting Comcast, Clorox, PepsiCo, Cabot, and Public Storage due to weakening fundamentals, slowing volumes, rising competition, margin pressure, and less attractive valuations relative to growth prospects. Capital was redirected toward higher-conviction opportunities by increasing CF Industries and initiating positions in The Trade Desk, Constellation Brands, Campbell’s, and NNN REIT. CF was increased for its strong earnings power, low-cost production advantage, and attractive valuation with upside from decarbonization initiatives. The Trade Desk was added for its sustained revenue growth, strong free cash flow, and exposure to secular shifts in digital and connected-TV advertising. Constellation Brands was purchased for its high-quality beer portfolio, improving earnings visibility, and discounted valuation. Campbell's was added for stable cash flows and undervaluation, while NNN REIT was initiated for durable income, dividend growth, and attractive price-to-FFO valuation.
Overall, the portfolio became more balanced, with improved risk-adjusted return potential, stronger cash generation, and a clearer blend of quality, value, and selective growth.
The portfolio exhibits a well-balanced blend of quality, growth, value, and income factors, with a clear tilt toward high-return franchises and durable cash-flow generators. Strong contributions from Communication Services and Financials reflect exposure to secular growth platforms such as META, NFLX, and GOOGL, alongside capital-efficient financial leaders like JPM, GS, and BK that benefit from higher returns on equity and healthy capital markets activity. The Information Technology sleeve emphasizes profitable, asset-light businesses with recurring revenues and pricing power, supporting a quality and profitability bias rather than speculative growth. Energy and Materials provide an inflation-hedging and cyclical ballast, while Real Estate and Utilities add income stability and valuation support. At the same time, underperforming exposures in traditional Consumer Staples and certain cyclicals highlight the portfolio’s discipline in avoiding crowded defensives with limited growth. Overall, the portfolio reflects a thoughtful combination of growth at a reasonable price, strong balance-sheet quality, and selective cyclical exposure — positioning it to participate in upside while maintaining resilience across economic environments.
The portfolio’s most significant sector allocations are to the Financials, Information Technology, Communication Services, and Consumer Discretionary sectors. Our target weightings versus the Russell 1000 Value Index are as follows: Information Technology 34.8% vs. 11.0% benchmark, Healthcare 9.7% vs. 12.3%, Financials 13.0% vs. 21.8%, Consumer Discretionary 10.3% vs. 7.6%, Communication Services 10.7% vs. 8.4%, Industrials 8.0% vs. 12.8%, Consumer Staples 4.9% vs. 7.4%, Energy 2.9% vs. 5.9%, Utilities 2.3% vs. 4.5%, Materials 1.7% vs. 4.0% and Real Estate 1.9% vs. 4.0%.
Overall, this portfolio aims to strike a balance between growth and stability by combining innovative growth companies with established blue-chip stocks and defensive sectors, making it suitable for investors seeking long-term capital appreciation through prudent diversification across the U.S. economy.
The Smart Value portfolio strategy uses measures of economic profitability, balance sheet sustainability, cash flow generation, valuation, economic trends, liquidity, and market sentiment to make objective, rational decisions about how much capital to allocate and where to invest it.
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 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.
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.
Day Hagan Asset Management is a division of and doing business as (DBA) Ashton Thomas Private Wealth, LLC, an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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Definitions:
*“Magnificent Seven”: Apple, Microsoft, Alphabet (Google), Amazon, Meta Platforms, Nvidia, Tesla
Russell 1000 Value Index: Russell 1000 Value Index measures the performance of large U.S. companies from the Russell 1000 universe with lower price-to-book ratios and lower forecasted growth values, serving as a benchmark for large-cap value stocks with traditional sectors like Financials and Health Care. It's a market-cap weighted index, annually reconstituted, providing an objective measure of the U.S. large-cap value segment.
Russell 1000 Growth Index: Russell 1000 Growth Index tracks the performance of large-capitalization U.S. stocks exhibiting strong growth characteristics defined by higher price-to-book (P/B) and price-to-earnings (P/E) ratios, and higher forecasted growth, separating them from value stocks within the top 1,000 U.S. companies (the Russell 1000). It serves as a benchmark for the large-cap growth segment, capturing companies expected to grow faster, often reinvesting earnings, and is reconstituted annually.