A stock portfolio can be hedged in a variety of ways, from holding bonds to taking short positions, betting that the price of a security will fall.
Joseph Artuso, co-director of the Easterly Snow Long/Short Opportunity Fund (SNOAX) , takes the latter approach. The fund has $102 million in assets, according to Morningstar. And Easterly Investment Partners has $1.7 billion under management.
The long/short fund has generated annualized returns of 18% over the past 12 months, 7% over the past three years, 10% over five years and 5.29% over 10 years, according to Morningstar.
This beats the research firm's long-short stocks category average for all four periods.
We recently spoke with Artuso about his strategy. He said short positions are meant to manage risk – the risk of long positions. The fund uses options and ETFs to establish short positions.
The fund is overweight energy, materials and information technology.
TheStreet/Easterly Investment Partners
Easterly's Joe Artuso Investment Philosophy
TheStreet.com: What is your investment philosophy?
Arthur: We believe in a well-diversified portfolio of companies with excellent and safe returns. These are the companies where the price is depressed and we believe that (in) the long term the shares will be rerated (according to the change in the perception of the company). We are trying to take advantage of the investor overreaction. It's a classic value approach.
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TheStreet.com: What is the appeal of having long and short positions in your portfolio?
Arthur: Short positions are usually based on pair trades with long positions and we sometimes short a stock based on its fundamentals. It's risk management. We can hedge macroeconomic and sector risk, reducing our exposure to stocks.
In pairs trading, we may have a favorable view of a company, but it could be in an industry with a temporary dislocation of sentiment. That's why we want exposure to only one company. We could short an index ETF that covers the industry or short another stock in the industry if we have a less favorable view of it.
TheStreet.com: Can you comment on some of your activity options?
Arthur: We sell call options against names that are performing but are reaching the last entries in our investment themes. (Call options give the owner the right, but not the obligation, to purchase a security at a pre-set price and on a set date. Option sellers receive a premium payment from option buyers.)
Selling the options generates income for us. We will short the overall market or an index using options and ETFs. Now, with the market trading at 20 times forward earnings, largely driven by the top 10 names, we are short on index and ETF options.
TheStreet.com: What are some of your favorite industries?
Arthur: We are overweight energy, information technology and materials. Energy is the cheapest sector in the market, with 12 times forward earnings. It has some of the best balance sheets and free cash flow yields.
We believe that energy demand will increase over time. China and India (have plenty of room for that growth) as their middle class expands. There will be a lot of demand for fossil fuels even though demand will stagnate in the developed world.
In terms of IT, artificial intelligence is what is driving the market for the last year. We are finding ai-related value in legacy technology companies: data software, IT services and cybersecurity.
TheStreet.com: Is there an industry you don't like?
Arthur: We don't build our portfolio that way. We generally take a short position to combine with a long position. That said, we are underweight the industrials, consumer staples and financials sectors.
Artuso de Easterly Stock Picks
TheStreet.com: Can you talk about three of your favorite stocks?
Arthur: 1. My favorite name now is Suncor Energy (they are) , a Canadian oil and gas producer focused on tar sands. It is a great story of change. It has many years of missing production targets, higher than expected costs, and worse yet, a very poor safety record.
They installed a new CEO, Richard Kruger, in early 2023, and he led a turnaround. Last year was the second highest in the company's history in terms of production and Suncor increased its dividend.
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It's still a show-me story, but the stock is trading at a significant discount to its global peers.
2. B2Gold (BTG) , a Canadian gold miner. The stock has not responded to record gold prices. It has underperformed gold miner indices over the past three years.
There is a new mining code in Mali, where more than half of the company's output is produced. There is uncertainty about the operating environment.
But B2Gold has been successful over the past 20 years in contested geographies. In Mali there are more geopolitical concerns than operational ones.
The management hopes to reach a solution with the new code. And its current production is safe under the 2012 code. The company also acquired a Canadian mine last year.
3. Amgen (AMGN) , the biotechnology company. It is a global leader in biopharmaceuticals. Its purchase of Horizon Therapeutics last year gave it exposure to the rare disease segment.
Only 5% of rare diseases have drugs, so there is plenty of room to grow. Amgen can leverage its rare disease drug sales and distribution model. Horizon did not sell its drugs internationally, but Amgen will.
It is also working on anti-obesity drugs, which could launch in 2028. At 13 times Amgen's earnings, not much value is being attributed to its obesity portfolio. The multiple should rise.
The author owns shares of Amgen.
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