Funds focus on banks, media amid mid-cap stock rally

NEW YORK: The S&P 400 MidCap index has surged to its best start to a year since 1991, both rewarding fund managers and forcing them to work harder to seek out bargains in a group that is now the most expensive part of the United States market based on their historical averages.

The rally in mid-cap stocks — companies with a market valuation between US$2 billion and US$10 billion (RM8.18 billion and RM40.92 billion) — has come during a broad rally in global stock markets as investors price in a resolution in the trade talks between the United States and China and fewer interest rate hikes by the Federal Reserve (Fed).

Mid-caps are up 14 per cent year-to-date and sport an average price-to-earnings ratio of 16.9 times forward earnings, for their highest valuation premiums to small-cap stocks since 2017, according to Bank of America Merrill Lynch research.

Yet fund managers from Janus Henderson, Hotchkis & Wiley, and Fairpointe Capital are among those who are still finding values by concentrating on financial, energy and media stocks and eschewing the high-priced real estate investment trusts and utility companies that make up nearly a fifth of the benchmark index.

“The window for the big bargain bin was the fourth quarter and that was about it,” said Kevin Preloger, a portfolio manager of the US$3.3 billion Janus Henderson Mid Cap Value fund. “We’re looking for companies that have good balance sheets and good cash flow, but the tough part is reasonable valuations.”

Preloger’s fund is finding them in financial companies such as M&T Bank Corp and Hartford Financial Services Group Inc that are increasing their stock buybacks at the same time they have been beating analysts’ earnings expectations. Shares of M&T, for instance, are up 20.8 per cent since the start of the year and trade at a forward price-to-earnings ratio of 11.8.

“Financials are the cheapest sector in the space, and their earnings are also growing,” Preloger said.

Stanley Majcher, a portfolio manager of the US$1.4 billion Hotchkis & Wiley Mid-Cap Value fund, is buying into overlooked financial and energy stocks because he considers them less risky than utility companies or real estate investment trusts (REITs) with higher valuations.

“Energy is very out of favour and there’s a perception that it’s a risky business because oil prices are likely to be low for a long period of time because of the market share war between Opec (Organisation of the Petroleum Exporting Countries) and the US,” he said. “But we see low volatility of demand and more discipline on the supply side.”

Among its largest holdings, Majcher’s fund has several energy companies, including Whiting Petroleum Corp, Kosmos Energy Ltd and Ophir Energy PLC, according to Morningstar data, with mixed results for the year to date. Shares of Whiting are up 12.4 per cent year-to-date, while shares of Ophir are up nearly 53 per cent over the same time.

Thyra Zerhusen, a portfolio manager of the US$2.6 billion AMG Managers Fairpointe Mid Cap fund, said her fund is finding opportunities in media stocks such as broadcast company Tegna Inc, which was spun off of Gannett Co, magazine and local broadcasting company Meredith Corp and New York Times Co — all of which should see a significant boost in revenues from the 2020 presidential and congressional elections, she said.