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NEW YORK, March 15 (Reuters) – The S & P 400 Mid-Cap index is enjoying a better start to the year since 1991, rewarding fund managers and forcing them to work harder to look for good deals in the group that is expensive part of the US market based on their historical averages.
The upturn in mid-cap stocks – companies with a stock market value of between $ 2 billion and $ 10 billion – has been produced during a broad recovery in global equity markets, with investors taking into account a resolution of trade talks between the United States and China and a reduction of interest rates hiking the Federal Reserve.
Mid-cap companies have risen 14% since the beginning of the year and have an average price-earnings ratio of 16.9 times forecast earnings, their highest valuation premium on small-cap stocks since 2017, according to Bank of America Merrill Lynch's research.
Yet the fund managers of Janus Henderson, Hotchkis & Wiley and Fairpointe Capital are still among the values that persist by focusing on financial, energy and media stocks and avoiding high-priced real estate investment trust companies and corporations. of utilities that make up close to one-fifth. of the benchmark.
"The big business window was the fourth quarter and that was just about everything," said Kevin Preloger, a portfolio manager of the $ 3.3 billion Janus Henderson Mid Cap Value fund. "We are looking for companies that have good balance sheets and good cash flow, but the most difficult part is reasonable valuations."
The Preloger Fund finds them in financial companies such as M & T Bank Corp and Hartford Financial Services Group, which increase their share buybacks at the same time as they exceed badysts' earnings forecasts. M & T shares, for example, have risen 20.8% since the beginning of the year and are trading at a forecast price / earnings ratio of 11.8.
"Financial services are the cheapest sector in the industry, and their revenues are also rising," said Preloger.
Stanley Majcher, a portfolio manager of the $ 1.4 billion Hotchkis & Wiley Mid-Cap Value fund, buys neglected financial and energy stocks because he sees them as less risky than utility companies or REITs at higher valuation.
"The energy is very out of favor and we have the impression that it is a risky business because oil prices will remain low for a long time because of the war of market shares between OPEC and the United States", he declared. "But we are seeing low demand volatility and more discipline on the supply side."
The Majcher's fund includes several energy companies, including Whiting Petroleum Corp., Kosmos Energy Ltd. and Ophir Energy PLC, according to Morningstar data, with mixed results for the year. Whiting shares have increased 12.4% since the beginning of the year, while those of Ophir have increased by almost 53% over the same period.
Thyra Zerhusen, a portfolio manager of the $ 2.6 billion AMG Managers Fairpointe Mid Cap Fund, said her fund was uncovering opportunities in the media, such as broadcast company Tegna Inc., which was created by Gannett Co, a magazine and the local broadcasting company Meredith Corp. New York Times Co, which should all see a significant increase in revenues from the 2020 presidential and legislative elections, she said.
"When everyone comes to the presidency, political advertising addresses these small market stations. Newspapers are almost non-existent at the moment, "with the exception of the New York Times, which continues to develop digital subscriptions, she said.
It also adds opportunistic positions in companies such as Westinghouse Air Brake Technologies Corp., which completed its merger with General Electric Co's transportation unit on Feb. 25. Its shares rose 2.9% year-on-year and remain stable. percent below the point where they were trading six months ago.
"We are trying to add actions for which there might be a problem in the short term, but the long-term outlook looks good," she said. (Report by David Randall, edited by Jennifer Ablan and Leslie Adler)
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