The Day Hagan Logix Tactical Dividend Strategy had another strong month in August, extending its year-to-date and one-year outperformance versus its benchmark Russell 1000 Value. In August, the strategy was +2.35%* gross of fees (versus the Russell 1000 Value +1.48%), leaving it +5.68%* for the year to date (versus the Russell 1000 Value at +3.71%) and +17.86%* over the last twelve months (versus the Russell 1000 Value at +12.47%). Our performance comes as we continue to hold a defensive cash position.
Among the performance leaders for the month was Cisco Systems (CSCO), which is part of our Communications & Networking industry grouping. CSCO was purchased in September of 2017 and is now up over +46%* total return since purchase. As is typical for our strategy, we purchased CSCO at an attractive price, with sentiment at that point overwhelmingly negative around a name widely viewed in tech circles as a “melting ice cube” (thanks to Jefferies Research for the use of their metaphor). In contrast, the most recent earnings report from CSCO, in addition to blowing away consensus estimates, showed the continued, successful transition to a software- and service-based subscription model, which is to the company’s long-term benefit. Additionally, high single digit organic growth and strong margins demonstrate that increasingly complex networks leave CSCO in the driver’s seat strategically given their comprehensive capabilities across the networking continuum. It doesn’t hurt from a shareholder’s point of view that CSCO still has about $19B in share repurchases available.
Specialty Retail stocks also posted impressive performance in August, including The TJX Companies (TJX), Tractor Supply (TSCO) and Lowe’s (LOW). While we continue to see upside in these companies and the industry group, it is interesting to note our original entry price, while sell-side equity analysts increased their price targets en masse after these companies’ strong earnings reports and another jump in share prices. For example, we initially purchased TJX in September 2017 at an average price of just under $74* a share. Total return since purchase, inclusive of dividends, is about +50%*. Following the TJX earnings report, with the stock closing in on $110, eight sell-side analysts raised their price targets on the company. The point is not to disparage the sell-side (the research and modeling provide great data points) but rather to show the importance of attractive entry points that allow for the purchase before sentiment shifts and the price takes off. LOW has a similar story, purchased in June of 2017 at an average close to $79* per share, realizing total return of about +40%* to date. In the latter half of August, we saw five sell-side analysts raise their price targets post earnings with the stock at over $108.
To provide perspective on both ends of the performance continuum, Owens & Minor (OMI) was weak following its earnings report in early August. While OMI’s quarter was less than stellar, we felt at the time the price drop was an overreaction and that our long-term valuation thesis remained intact. Many of the issues during the quarter were transitional, including a higher-than-expected tax rate (30% vs. expectations of 25%, with the company projecting a return to 25% in 2019), warehouse inefficiencies, severance expenses and raw material pricing headwinds. Management, however, still projects a double digit earnings increase in 2019, and the two recent acquisitions OMI has made should drive long-term growth in new strategic areas. Those acquisitions include Byram Healthcare, a market-leading medical distributor in the direct-to-patient home healthcare market. Byram has over 600 payor contracts covering 200 million lives. A more recent acquisition is Halyard Surgical & Infection Prevention, which is already moving OMI’s own branded, higher-margin product sales from low single digits to low double digits as a percentage of firm revenue. We expect both acquisitions to drive top and bottom line growth for OMI. Apparently, the market is starting to understand that as well. Since the stock’s lows post earnings, it has bounced back by around 18%* and over the last three months, it is still in positive territory, up more than 4%*.
During the month we purchased a familiar name, Halliburton (HAL), in our Energy industry grouping. HAL, a global leader in oilfield services and equipment, was previously sold in mid-January 2018 after a roughly 25%* gain over a less than three month holding period starting in October 2017. The brief holding period is generally atypical for our strategy, but HAL rapidly hit our objective measure of fair market value. Subsequently, HAL shares dropped down to levels slightly below our initial purchase in October and once again, based on our process, we see a compelling opportunity to generate returns. At current prices, we believe the stock already incorporates activity and price weakness in North America (driven in large part by Permian Basin capacity constraints), an issue likely to correct itself over the coming quarters. In 2019, with additional pipeline capacity coming online in the Permian, combined with an inflection in international activity leading to double digit growth topline, HAL should be well positioned.
Ned Davis Research (NDR) recently produced a chart that shows the industry effect on the returns of individual stocks has been rising over the past several years. As those familiar with the Day Hagan Logix Tactical Dividend strategy have heard many times, our invested portfolio selection process starts with the consideration of attractively valued industries, followed by individual stocks within those industries. Our consistent and methodical valuation criteria has demonstrated over the last nearly seventeen years that starting with industries, and buying only the most compelling risk-return stocks within an industry, has been successful in generating attractive portfolio alpha and optimal upside and downside capture (76% upside/53% downside).
A good case study of how the industry effect works in the strategy relates to our purchase and sale of Asset Management. In February 2016, with a great deal of negative sentiment around the industry, we purchased the most compelling stocks within Asset Management. We recognized some of the reasons behind the skepticism of the industry as valid but saw entry points and our ultimate price targets as compelling. Moving in and out of stocks within the industry grouping along the way, we held it until January of 2018 for a gain of over +60%*, at which point the industry had approached our measure of fair market value. Interestingly, the asset management stocks we sold as we exited the industry in January have dropped by over 22% since then, with weak industry performance. While there is not enough compelling value at this point to consider the industry for purchase, more generally it provides an example of how our strategy benefits by buying and selling as an industry. We believe the rising trend of industry influence identified by NDR is beneficial to the strategy, but regardless, our industry-based approach has produced attractive outperformance since 2002 inception.
As we head into the last four months of 2018, we recognize that in August we hit the longest bull market on record. We can reasonably debate what that means for the markets moving forward, but in any case we remain confident in the foundation of the Day Hagan Logix Tactical Dividend strategy to handle whatever the future brings.
Please don’t hesitate to reach out anytime with questions or comments.
- Robert Herman
- Donald L. Hagan, CFA
- Jeffrey Palmer
- Arthur S. Day
PDF copy of the article: Day Hagan Logix Tactical Dividend Strategy Update September 2018 (PDF)
The net return for the Day Hagan Logix Tactical Dividend strategy in August was +2.29%; year-to-date net return through August was +5.26%; and the 12-month net return through August was +17.24%.
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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.
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