The nine year bull market has come to an end, shocking investors with a wave of volatility spurred by fears regarding an impending global trade war, heightened regulatory pressure on high flying industries such as tech, concerns over tightening monetary policy and inflation, all against the backdrop of broader market uncertainty.
Charlie Dreifus, a hedge fund manager with over five decades of experience on the Street and the co-manager of the $1.4 billion Royce Special Equity (RYSEX) Fund, has compiled a list of five stocks he expects will rake in returns for investors in the long term, all which are particularly resistant to greater market turmoil, as outlined by Barron's. Dreifus's fund is intended for investors with a full market cycle horizon, and is "for those more concerned about losing their wealth versus making more."
While the fund, which focuses on a portfolio of 38 stocks with clean balance sheets, has lagged peers for much of the last decade, its risk-adjusted returns top all other small-cap value funds covered by Morningstar analysts, as noted by Barron's. Its performance has been particularly strong during severe sell-offs, beating 90% or more of its peers in 2002, 2008 and in 2016, and outperforming the Russell 2000 benchmark index by an average of two percentage points per year.
"The more bubbly and dynamic the market, the more we will lag, but in the end we will do better because the fund tends to go down less [in downturns] and has less volatility, which makes it more likely investors will stay the course," said Dreifus in an interview with Barron's published on April 2. (For more, see also: Stocks Post Worst Q1 Since Great Depression.)
Dreifus's fund, while cutting its brick-and-mortar holdings in half over the past two years to about 12.5% of assets likes Children's Place Inc. (PLCE). The fund's largest holding has transformed to meet changing consumer demands and shopping habits, closing down many of its physical retail stores and shifting to sell on Amazon.com Inc.'s (AMZN) marketplace. PLCE, with a forward 2018 price to earnings ratio at 18.6, according to Nasdaq data, is down 7.3% as of Wednesday close, compared to the S&P 500's 1.1% decline over the same period.
Ennis Inc. (EBF), a maker of printed business products, is another top pick for the Royce Special Equity Fund, despite its position in a dying industry. Dreifus likes that the company acquires smaller rivals at attractive valuations, achieves synergies and generates a lot of cash. The investor noted that EBF, down 2.6% YTD, has 18% of its share price in net cash, and pays a healthy 4% dividend. "We’re still using paper and if they are the last remaining player, don’t they have pricing power?" he stated.
As rising rates hurt companies with more debt on their balance sheets, the RYSEX fund's focus on companies with heaps of cash should benefit holdings like furniture maker Haverty Furniture Companies Inc. (HVT). The company, which has about 10% of its share price in net cash, is positioned to gain on higher rates, according to Dreifus. The stock, trading at a forward 2018 P/E ratio at 16.4 is down 14.1% YTD, underperforming the broader market.
Capella Education Co. (CPLA) is another firm that should gain on higher rates, while other companies are either on the cusp of financial crisis or like Toys "R" Us and Gymboree, are pushed into bankruptcy. CPLA, which has about 11% of its price in net cash, is up 14.3% in 2018, far outperforming the S&P's 1.1% decline. The stock trades at a forward 2018 P/E multiple of 20.7, according to Nasdaq data.
Standard Motor Products
Concerned over the Street's embrace of non-GAAP earnings, which excludes a range of items such as stock-option expenses and allows companies to "fudge the numbers," Dreifus recommends buying Standard Motor Products Inc. (SMP). The stock is up 8.7% YTD and trades at a forward 2018 p/e multiple of 14.2. "We have shared our concerns about non-GAAP use with the Public Companies Accounting Oversight Board. Who knows if we will see some clean up, but if we do, our companies would benefit," said the hedge fund manager. (For more, see also: 9 High-Return Stocks for a Shaky Market: Goldman.)