Day Hagan Smart Value Strategy Update September 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
U.S. equities advanced in August, with the S&P 500 rising approximately 2.0%, marking its fourth consecutive monthly gain as market breadth improved. The equal-weight S&P rose by 2.7%, and small-cap stocks outperformed, with the Russell 2000 (a proxy for small-cap stocks) increasing by 7.1%. From a sector perspective, Health Care and Materials led the pack, while Industrials, Utilities, and Information Technology were underperformers.
Better-than-expected earnings reports and economic data contributed to this upward movement. The annualized growth rate for Q2 GDP was revised up to 3.3%, while July inflation remained close to target levels, with the Personal Consumption Expenditures (PCE) index showing a year-over-year increase of 2.6% and the Consumer Price Index (CPI) at 2.7%. S&P 500 results for the second quarter indicated approximately 12% growth in earnings per share (EPS) and around 6% growth in revenue. Forward EPS growth expectations for 2025 hovered near 10%, with the forward price-to-earnings (P/E) ratio remaining around 22.
Finally, the overall macroeconomic tone shifted around Jackson Hole on August 22, where the Federal Reserve emphasized the importance of its framework and highlighted labor market risks. Combined with soft inflation figures published on August 12, this maintained the potential for a September easing, which would support long-duration sectors (such as Tech, Health Care, Real Estate, and Utilities), while cyclical leadership remained dependent on order volumes and clarity in trade policies.
Below, we identify 10 factors likely to have an outsized influence over equity returns during the rest of the year:
U.S. equities advanced in August, with the S&P 500 rising approximately 2.0%, marking its fourth consecutive monthly gain as market breadth improved. The equal-weight S&P rose by 2.7%, and small-cap stocks outperformed, with the Russell 2000 (a proxy for small-cap stocks) increasing by 7.1%. From a sector perspective, Health Care and Materials led the pack, while Industrials, Utilities, and Information Technology were underperformers.
Better-than-expected earnings reports and economic data contributed to this upward movement. The annualized growth rate for Q2 GDP was revised up to 3.3%, while July inflation remained close to target levels, with the Personal Consumption Expenditures (PCE) index showing a year-over-year increase of 2.6% and the Consumer Price Index (CPI) at 2.7%. S&P 500 results for the second quarter indicated approximately 12% growth in earnings per share (EPS) and around 6% growth in revenue. Forward EPS growth expectations for 2025 hovered near 10%, with the forward price-to-earnings (P/E) ratio remaining around 22.
Finally, the overall macroeconomic tone shifted around Jackson Hole on August 22, where the Federal Reserve emphasized the importance of its framework and highlighted labor market risks. Combined with soft inflation figures published on August 12, this maintained the potential for a September easing, which would support long-duration sectors (such as Tech, Health Care, Real Estate, and Utilities), while cyclical leadership remained dependent on order volumes and clarity in trade policies.
Below, we identify 10 factors likely to have an outsized influence over equity returns during the rest of the year:
Fed policy path. Expected September rate cuts will ease financial conditions and support valuations; yet political pressure on Fed independence risks higher-term premiums and volatility.
Inflation trajectory. Disinflation remains gradual with PCE near 2.6%; new tariffs could re-accelerate prices, complicating policy and compressing real incomes.
Labor market. Cooling labor demand and rising unemployment soften wage pressures but raise recession risk; services employment indices remain contractionary.
Earnings growth and revisions. Consensus still expects S&P 500 EPS growth into late 2025; revisions and margin trends will determine strength beyond the mega caps.
AI capex cycle. Hyperscaler AI and data-center capex exceeding $250 billion will likely shape sector leadership, semiconductor demand, and utility investment.
Fiscal deficits and Treasury supply. Large Treasury borrowing could elevate term premia, challenge equity multiples, and favor cash-flow-durable businesses.
U.S. dollar trend. A weaker dollar, resulting from expected cuts, supports exporters and commodities, but inflates import costs under tariff regimes.
Energy prices. OPEC+’s supply increases and softer demand keep oil subdued, easing headline inflation but capping energy sector earnings.
Shareholder buybacks. Record buyback authorizations underpin per-share earnings and downside support; execution pace matters if volatility rises.
Global growth and trade. China’s slowdown and tariff disputes are putting pressure on global demand and supply chains, affecting U.S. cyclicals and multinationals.
Balancing the potential for modestly higher longer-term bond yields, ongoing political and Fed policy uncertainty (though leaning more dovish), tech and AI stock weakness, tariff-related volatility, seasonal September risk, potential Fed rate cuts, broad corporate earnings strength, solid consumer spending, still-good capital flows into ETFs (mostly by retail), and safe-haven inflows (like gold, signaling defense) ultimately leads to the same conclusion: Some excesses still need to be worked down, but given the better economic outlook, supported by corporate earnings forecasts, we currently don’t expect an extended decline. Should our models shift more negatively, we will quickly move to reduce risk.
Moreover, the weight of the evidence suggests that any weakness is unlikely to extend into a significant downtrend at this time. Of course, if our risk management models shift to a negative outlook, signaling increasing probabilities that more substantial problems are on the horizon, we will raise cash immediately. While we focus primarily on financial metrics and a bottom-up analysis for our holdings, there are cyclical supports in the wings that could tangentially benefit our holdings.
When taking a quantitative view of the portfolio’s drivers, it is essential to note that the portfolio combines durable cash-flow compounders, cyclical real-asset exposure, and rate-sensitive income. Below, we outline factor tilts, economic linkages, and stock-specific characteristics by sector.
Communication Services: (CMCSA, GOOGL, IPG, META)
Scale and network effects dominate. Alphabet and Meta are ad GDP-beta plays with AI-driven operating leverage and ongoing regulatory risk. Comcast’s broadband oligopoly and content/parks diversification add defensiveness and a free cash flow yield. Key factors include quality, profitability, and momentum, as well as sensitivities to ad cycles, shifts in privacy policy, and capital expenditures for cloud/edge delivery.
Consumer Discretionary: (AMZN, LULU, SBUX, ULTA)
Mix of platform economics and premium brands. Amazon pairs low-margin retail flywheel with high-margin cloud; operating leverage hinges on logistics density and AWS demand. Lululemon benefits from brand loyalty and store productivity. Starbucks monetizes a global rewards ecosystem and throughput efficiency. Ulta’s category breadth and loyalty program drive repeat traffic. Factors: growth and quality with exposure to wage costs and discretionary income; limited pricing elasticity for leading brands.
Consumer Staples: (CLX, PEP, HSY, SJM)
Defensive cash generators with brand equity and shelf space advantages. Pricing power offsets input cost inflation with a lag. Balance sheets and dividends support low volatility and quality tilts. Execution risk centers on volume recapture after price hikes and private-label competition.
Energy and Midstream: (CTRA, CVX, KMI)
Chevron provides integrated scale and capital discipline. Coterra’s cash returns track gas/liquids price decks and drilling efficiency. Kinder Morgan’s fee-based pipelines add yield and inflation escalators with lower commodity beta. Factors include value, dividend yield, and inflation sensitivity; primary risks are commodity volatility, regulatory changes, and project timing.
Financials and Payments: (BK, BLK, BRK.B, GS, JPM, SEIC)
Diversified earnings streams tied to rates, markets, and credit. BNY Mellon leverages rate-sensitive balances and custody fees. BlackRock compounds its growth through scale, ETFs, and technology distribution. Berkshire allocates countercyclically with insurance float and industrial exposure. Goldman Sachs is cyclical in its approach to deals/trading; JPMorgan combines a leading deposit franchise with credit discipline. Factors include quality and profitability; drivers are yield-curve shape, spreads, and market volatility.
Healthcare: (BMY, MRK)
Large-cap pharma with pipeline optionality and cash returns. Defensive factor exposure stems from inelastic demand; event risk revolves around trial data, patent cliffs, and pricing policy. Quality and low volatility are dominant tilts.
Industrials and Building: (DE, OC)
Deere’s precision ag cycle is tied to farm incomes, equipment replacement, and software monetization; margins hinge on the mix and aftermarket. Owens Corning benefits from repair-and-replace roofing and U.S. housing activity with disciplined capital returns. Factors: quality and asset efficiency with moderate cyclicality.
Information Technology and Software: (CRM, CSCO, CTSH, DBX, DOX, QCOM, ZM)
Recurring revenue and mission-critical workloads form the foundation of the group. Salesforce monetizes consolidated enterprise platforms and expansion selling. Cisco benefits from installed-base stickiness and subscription mix shift. Cognizant’s consulting/services exposure is tied to enterprise it budgets. Dropbox scales freemium to paid conversion with disciplined capital expenditures. Amdocs’ telecom software is long-cycle and sticky. Qualcomm is leveraged to handset cycles and edge AI, with licensing cash flows. Zoom’s UCaaS platform trades off growth vs. Margin expansion. Factors: quality and growth; sensitivities include spending, pricing for seats/modules, and competitive roadmaps.
Materials and Chemicals: (CBT, CF)
Cabot (specialty carbons, performance materials) derives pricing power through formulation value and exposure to the automotive and electrification sectors. CF’s nitrogen economics ride gas spreads, corn acreage, and export flows; returns focus on variable cash generation and buybacks. Factors: value and inflation sensitivity; watch energy input costs and ag cycles.
Real Estate: (O, PSA, VICI)
Realty Income’s long-duration net-lease cash flows offer predictable AFFO with rate sensitivity. Public storage benefits from short lease terms, enabling faster repricing and operating leverage. Vici’s triple-net gaming contracts provide CPI-linked escalators and high coverage ratios. Key factors include dividend yield and low volatility; primary risks are funding costs and changes in the capitalization rate.
Utilities and Power: (NFG, OGE)
Merchant/retail power with hedging programs; earnings track load, power prices, and retail churn. Capital returns center on buybacks and selective investment in reliability and distributed energy. Factors: value and defensive yield, with sensitivity to commodity prices and weather conditions.
Cross-portfolio takeaways: The allocation balances growth platforms (digital ads, cloud, software) with cash-rich defensives (staples, pharma), income and inflation hedges (midstream, REITs), and financials geared to the yield curve shape and credit trends. Style tilts lean toward quality and profitability, with a focus on selective value and dividend yield. Macros to monitor include real rates, wage growth, commodity spreads, and ad/it budget cycles. Stock-specific alpha should come from pricing power, operating leverage, disciplined capital allocation, and resilience through policy and cycle turns.
The portfolio’s largest sector allocations are Financials, Information Technology, Communication Services, and Consumer Staples. Our target weightings versus the Russell 1000 Value Index are as follows: Information Technology 16.6% vs. 9.9% benchmark, Healthcare 4.3% vs. 11.8%, Financials 15.1% vs. 22.6%, Consumer Discretionary 5.8% vs. 8.0%, Communication Services 11.5% vs. 7.8%, Industrials 4.4% vs. 13.0%, Consumer Staples 8.0% vs. 7.8%, Energy 5.5% vs. 6.1%, Utilities 4.7% vs. 4.4%, Materials 4.1% vs. 4.2% and Real Estate 5.9% vs. 4.2%.
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 utilizes measures of economic profitability, balance sheet sustainability, cash flow generation, valuation, economic trends, monetary liquidity, and market sentiment to make objective and rational decisions about how much capital to allocate and where to invest 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.
For more information, please contact us at:
Day Hagan Asset Management, 1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930 | Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
