Joshs Finance

Stock Picks, Investing Strategy From a Top 1% Fund Manager – Business Insider

  • James Abate of Centre Asset Management has beaten 99% of funds this year.
  • The fund manager believes that a recession could be worse than persistent inflation.
  • Here are seven of Abate’s favorite stocks and the four qualities he looks for in investments.

Being in the top 1% of one’s field should be a cause for celebration in any industry, especially one as ruthless and unforgiving as finance.

But such a performance is nothing new for James Abate. Abate is the founder, managing director, and CIO at Centre Asset Management, and through his flagship fund, the Centre American Select Equity Fund (DHAMX), Abate has beaten 99% of competitors in not only 2022 but also in 2020. In fact, Abate’s fund is in the top 1% on a one-, three-, and five-year basis, per Morningstar.

Secrets to success from a top fund manager

Since his fund’s inception in late 2011, Abate told Insider that he’s targeted stocks with four key attributes: those that invest in their businesses, expand their profit margins, improve their balance sheets, and benefit from changes in cyclicality. The first three qualities are straightforward, while the latter refers to buying cyclical names when the economy is booming and leaning on defensively oriented companies during times of weakness.

“What distinguishes our process is that it is not myopically focused in on just looking at earnings per share changes,” Abate said in a recent interview with Insider. “And unfortunately, the way the business has evolved, I think price momentum — and price as a determining variable — has really kind of overtaken much of the ‘securities analysis.'”

In other words, Abate believes that stock analysts spend more time following the pack than truly breaking down a firm’s fundamentals. This herd mentality can cause analysts to be influenced by what’s happening instead of what should be happening. For example, an analyst might view a stock more favorably based on the fact that it’s rising instead of on its underlying business.

That momentum mindset may have worked in the previous five years when interest rates were at rock-bottom levels, but Abate noted that investors have now shifted their focus to earnings as interest rates rise dramatically in response to inflation that’s at its highest level in over 40 years.

Tighter financial conditions mean that investors are less willing to pay a premium for earnings and growth that could be years away, Abate noted. That dynamic has turned markets upside down, the portfolio manager said, which has made it much tougher to make a quick buck.

Expect the inflation problem to persist

The Federal Reserve has embarked on an anti-inflation crusade, and the consequences of that decision extend far beyond the stock market. A swath of market pundits now believe that the Fed’s sudden hawkish pivot will send the US economy hurtling into a recession.

“Ultimately, we think the Fed will win the battle, but the question really becomes: How much pain do they inflict in terms of the economy and financial markets?” asked Michael Sheldon, the chief investment officer at RDM Financial Group, in an interview with Insider.

Leading portfolio manager Jeff Muhlenkamp recently told Insider that the Fed might even welcome a recession if it caused inflation to fall back to a normal level, even though doing so could be a mistake. And Abate went as far as to say that the Fed might “engineer a recession .”

However, Abate thinks that the Fed’s purported cure to inflation may be worse than the disease itself. And it’s not because the portfolio manager believes that inflation will abate on its own. 

“At some point, there’s going to come recognition that a recession and throwing people out of work and slowing down the economy is a worse outcome than inflation staying in place,” Abate said. 

The portfolio manager continued: “So perhaps unique to maybe almost every other person that you’re going to talk to, we think the Fed is going to be unsuccessful — and actually purposely unsuccessful — in basically bringing inflation under control.”

If Abate is right in his hunch that the Fed will decide not to take a wrecking ball to the economy and will instead let inflation linger in the long term, he said that investors would “absolutely” be smart to buy the dip in energy stocks, which are down about 23% in the past month.

“For people who want to move into the sector at this point in time, we think this is an excellent opportunity to start building significant positions in all the companies which have exposure in the domestic natural gas market as well as the integrated oils,” Abate said.

Oil and gas prices are historically high right now because of a supply-demand imbalance, Abate said. The resumption of travel has helped energy demand rebound sharply from pandemic lows, and there aren’t enough oil rigs to keep production up and prices in check, Abate explained.

Crude oil is trading near $100 per barrel, and Abate noted that oil companies “are immensely profitable at anything north of $65 a barrel.” Many of these firms fit Abate’s criteria, as they’re reinvesting, keeping margins high, staying financially healthy, and enjoying a cyclical boom.

“The companies maintaining and, in fact, fortifying their capital discipline because of this recent selloff are going to be just essentially cash-flow-generating machines for the foreseeable future,” Abate said.

7 top stock picks

Outside of the energy sector, Abate listed seven of his top stock picks. He said that he’s been “relatively selective” within the tech sector and other growthy groups, though he sees some opportunities. However, Abate made it clear that stocks that have sold off aren’t always cheap.

Below are seven of Abate’s favorite stocks along with the ticker, market capitalization, price-to-earnings (P/E) ratio, and thesis for each.

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