Want to know how to invest in 2023? Red Hot Fund Manager Dale Harvey says every investor should fasten their seat belts.
Both the economy and the stock market are in good shape for the new year, at least in the first half of 2023. “We could be in for a rough ride in 2023,” said Harvey of the $348 million Poplar Forest Partners Fund (PFPFX). ) is above water this year, returning 1.78% to Thursday, a negative 14.85% for the broader market in the form of the S&P 500 and a negative 3.95% for the fund’s direct large-cap value rivals tracked by Morning Star Direct.
That’s a tough year for the stock market. About half of all actively managed mutual funds have lagged the S&P 500. Most have posted negative returns for 2022.
How to invest in 2023
Harvey continued his assessment of the outlook for 2023 and how to invest next year: “The Federal Reserve has been very bullish on raising rates. We’re building a recession in our long-term forecast for at least half a year. I hope that proves it. Overly conservative. But That seems less and less every day.
Still, Harvey and colleague Derek Derman see a silver lining. “As the Fed’s rate of inflation fades, the back half of 2023 could be interesting,” Harvey said. “By the end of the year, I think the market will be in positive territory.”
To take advantage of the Fed’s tighter monetary policy, Harvey and Derman think “economically sensitive businesses priced for recession” are the most promising opportunities to invest in now and through 2023.
The boldest bets of this fund
You can get this fund manager’s ideas on how to invest in 2023 from their overall asset allocation. Note that Harvey and Derman are bottom-up investors. They pick stocks not by sector bets, but by individual stocks.
As of Sept. 30, the fund’s overweight relative to the S&P 500 was 13 percentage points. It was up six points in health care stocks and three points in consumer preferences.
The fund’s absolute weighting was more than 8% in industrials and energy.
How did Poplar Forest Partners outperform in a year when many investors lost ground? The fund does this by investing in things that many other investors don’t. “I used to joke that I succumbed to peer pressure in high school,” Harvey said. “We will leave it Tesla (TSLA) and Netflixes (NFLX) to other investors.
His possessions are not clear. His top five includes Chevron (CVX), Amerisourcebergen (ABC), All state (all of them), United Therapeutics (UTHR) and Wells Fargo (WFC)
A value-oriented fund seeks large and mid-cap stocks that are undervalued by the market. “We look for stocks where our research suggests a brighter future than the stock price itself,” Harvey said. “We are definitely opposites.”
Ultimately, Poplar Forest Partners’ decisions on how to invest will come down to their best-selected ideas. At the time of its recent announcement, the portfolio contained only 29 positions.
Also, Harvey and co-star Derek Derman are patient. The fund tends to hold stocks for three or four years. “We focus on companies that are in temporary depression,” Derman said. “And we focus on companies that pay dividends. So we pay to protect.”
How to Invest: Murphy’s Oil
The fund’s approach to holdings reflects Harvey & Darman’s approach to investing. Take it Murphy’s oil (MUR) “Murphy is a typical exploration and production company at a time when much of the industry has shifted to the Permian Basin,” Harvey said.
Companies that rely on fracking for energy tend to see production fade after a strong first year, Harvey says. Murphy does not suffer from that pattern. “They use a trail-blazing method to find wealth,” he said. “And they have skills in coastal regions.”
Murphy’s third difference is less than that Exxon Mobil (XOM) and Chevron. “So opportunities that aren’t enough to move the needle for Exxon or Chevron could still make sense for Murphy,” Harvey said.
Murphy’s fourth advantage? Its attractive price. “Trading at six times 2023 earnings, many investors don’t think they can deliver the earnings Wall Street expects,” Harvey said. But we believe it can.
The E&P firm is up 65% this year. Its dividend yield is 2.4 percent.
Dealing with patent expirations
When a drugmaker’s patent for a key product is about to expire, many investors head for the exits. Maybe not Harvey and Derman. Instead, as they decide how to invest their shareholders’ money, they sometimes find a new reason to bet on a long-term favorite stock. And so it is. Merc (MRK)
Merck’s top product is the cancer drug Keytruda. Many investors discount Merck because key patents on Keytruda expired in 2010. It will begin to expire in 2028. That opens the door to biosimilars made by rivals. But Merck’s research and business development combination will produce enough products to offset Keytruda’s loss of exclusivity, Harvey said.
That research includes other new products and new patent applications for Keytruda. “Merck is a very good company, a defense business, that sells at a discount,” Harvey said. “For now, it’s calm as you go.”
The drugmaker is up 49% this year. The yield is 2.7%.
The Poplar Forest Partners fund also looks at it Curtis-Wright (CW) Unlike most investors. Many other investors view Curtiss-Wright through a historical lens as an aerospace-defense contractor.
Harvey and Derman saw that value. But their decisions about investing are also shaped by Curtiss-Wright products. “We invested in Curtiss Wright before the current problems in Ukraine, which we feel are truly devastating,” Harvey said. “The company benefits from this as a defense company. But the most interesting thing is that they have a leading business in the production of heavy pumps used in nuclear power plants.”
Harvey added, “When you think about energy security, it becomes more of an issue in terms of what’s going on in Europe. And it’s an issue because of the threat of clean energy. So there’s a lot of newfound interest in the nuclear business. None of it is in Curtis-Wright’s earnings right now. But in the long term, 1.5 “It could be billions of dollars. So we think investors will get a free call option in that case. There are very few ways to invest in nuclear power. But Curtis-Wright is one of them.”
Curtiss-Wright is up 23 percent this year. The dividend is 0.5%.
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