Time To Shop For Value Names

Time To Shop For Value Names

This has been a challenging year for U.S. investors, but going into 2016, focus on value, one portfolio manager says.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

This is the holiday season, and much focus is on consumer spending. But forget retail, focus on value instead, particularly in tech, health care and financial sectors. That's Dan Neiman's call.

Neiman, who manages $275 million in assets, is partner and co-portfolio manager at Neiman Funds Management, a SEC-registered investment advisor in Williamsville, New York.

ETF.com: Should folks look to retail sales and to consumer discretionary stocks this time of year for insight into the health of the economy?
Dan Neiman: A focus on retail is more typical in the summer months. Not to be a contrarian, but, rather, you should look for value right now. The main focus of our large-cap fund, for instance, is to look for dividend-paying stocks and for what we feel are undervalued or fairly valued stocks in the market.

So today, to backtrack to retail, you're not seeing a lot of value in retail stocks, but you're still seeing some great performance out of those stocks. We're happy with the retail stocks we're in, mainly Costco and Nike, and more than happy to see the positive news that Black Friday was a success, cyber Monday was a success. The retail season is in full swing.

ETF.com: When you look back at 2015, what were your best value buys this year?
Neiman: Going back to about a year to the end of October/early November of 2014, as the price of oil declined into the $40/barrel range, I felt there was an opportunity inside certain areas of the oil sector; specifically the oil refining sector. We had positions in that sector, but we added to some of our oil positions, Valero Energy and Phillips 66, and those have been some of the best-performing positions we've had in 2015.

The oil refining segment didn't see the lackluster performance of, let's say, the big oil companies in the past year. I think that's due to increased production, increased margins, and I guess the ability for companies to profit by streamlining their production and processes.

ETF.com: Do you expect this segment to continue to do well into 2016? What do you like going into 2016?
Neiman: I still like Valero, Phillips and Marathon Petroleum. We've seen a bit of a turnaround now in the big oil companies, but I think, looking at the numbers, when I run the fundamental screening for value stocks, a lot of these energy companies still show they're going to continue to be a value into 2016.

ETF.com: What ETFs did you buy, or got out of, this year?
Neiman: We have two different ETF-focused strategies in our separate accounts. And they both revolve around asset allocation. In one of them, we pick assets from equities to bonds both domestic and international based on where we think the market will be going. We also have a rotation strategy where we rotate between different ETFs, and then rotate the percentage weighting of equities versus bonds. We focus our strategies on ETFs that are free to trade on either the Schwab or Fidelity platform at wherever the client account is held.

What we've done in our strategic allocation model is moved out of high yield over the past three months. We are more mid-duration, rather than long duration, at the moment. And we're not so heavily into Treasurys because they're not getting paid on that side.

On the equities side, we rotated about six months ago into three Guggenheim S&P 500 sector ETFs: the Guggenheim S&P Equal Weight Technology (RYT | A-71), the Guggenheim S&P Equal Weight Health Care (RYH | A-79) and the Guggenheim S&P Equal Weight Financial (RYF | A-87), because, when screening for value in the large-cap space, we're seeing those segments rise to the top of the fundamental value stream. It's a bottom-up management approach.

ETF.com: What could change these allocations? A Fed rate hike in December? Something happening in Europe? What's on your radar?
Neiman: In the macro sense, since about August of this year, I've tried to be at or around 10% cash in most of the portfolios that I manage. My macro view hasn't changed since that time, although the market has fluctuated. I think the rate hike is inevitable, and the talking of doing a rate hike has caused more volatility and more uncertainty in the market. It's almost to the point where the Fed just needs to get it done to help stabilize certain sectors and certain areas of the U.S. market.

With concerns about China and other Asian countries, and the dollar getting stronger, it's hard to see where robust growth in earnings will come from here in the U.S. But I do think, from a macro perspective, the Fed needs to just raise the rate a quarter point in December and let us move on and get past that so that we can start planning for future rate hikes and adjust our portfolios accordingly.

In this environment, continuing to hold cash is a good move. I wouldn't be holding 50% cash at this time, but if it raises rates more than a quarter point, I would adjust my cash allocation even higher. I don't want to be in growth equities when the growth in earnings isn't going to be there next year. So, large-cap value stocks, international and global companies that have diversified markets, those are the areas we want to be in.

ETF.com: Isn't 10% in cash a bit high considering that cash pays nothing? It's a defensive statement, right?
Neiman: Do I think 10% in cash is defensive for our large-cap value fund? That's relatively normal. In this strategy, we're buying only dividend-paying stocks. So, we're constantly bringing in cash from dividends. We also sell covered-call options, which also bring in cash. Our fund typically is in the 5-15% range in cash, because we might be selling stock on the upside; we might be raising cash with dividends and then using covered-call options on a monthly basis.

We take that cash at what we hope is an opportune time and put it to work by buying into various positions.

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.