Stock picks, investment strategy of a fund manager Top 1%

  • Center Asset Management’s James Abate beat 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 your field should be cause for celebration in any industry, especially one as cutthroat and ruthless as finance.

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

Secrets to the success of a top fund manager

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

“What sets our process apart is that it doesn’t focus myopically on looking at changes in earnings per share,” Abate said in a recent interview with Insider. “And unfortunately the way the business has evolved, I think price dynamics – and price as a driving variable – has really kind of overtaken a lot of ‘stock analysis’.”

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

This dynamic mindset may have worked in the previous five years when interest rates were at their lowest, but Abate noted that investors have now focused on profits as interest rates rise. considerably in response to inflation which is at its highest level in more than 40 years. years.

Tighter financial conditions mean investors are less willing to pay a premium for profits and growth that could take years, Abate noted. This dynamic has rocked the markets, the portfolio manager said, making it much more difficult to make a quick buck.

Expect the inflation problem to persist

The


Federal Reserve

embarked on an anti-inflationary crusade, and the consequences of this decision extend far beyond the stock market. A slew of market pundits now think the Fed’s sudden hawkish pivot will send the US economy into a recession.

“At the end of the day, we think the Fed will win the battle, but the question really becomes: what pain are they inflicting on the economy and financial markets?” asked Michael Sheldon, Chief Investment Officer at RDM Financial Group, in an interview with Insider.

Chief portfolio manager Jeff Muhlenkamp recently told Insider that the Fed might even welcome a recession if it brings inflation back to normal levels, although that might be a mistake. And Abate went so far as to say that the Fed could “design a


recession

.”

However, Abate thinks the Fed’s so-called inflation cure may be worse than the disease itself. And it’s not because the portfolio manager believes inflation will come down on its own.

“At some point, it’s going to be recognized that a recession, people being unemployed and the economy slowing down is a worse outcome than maintaining inflation,” Abate said.

The portfolio manager continued: “So perhaps uniquely for perhaps almost everyone else you’re going to talk to, we believe the Fed will not succeed – and in fact willfully fail – to essentially get inflation under control. .”

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

“For people looking to get into the industry at this stage, we believe this is a great opportunity to start building significant positions in all companies that have exposure to the domestic natural gas market as well as ‘to integrated oils,’ Abate said. said.

Oil and gas prices are historically high right now due to an imbalance between supply and demand, Abate said. Recovering travel has helped energy demand rebound strongly from pandemic lows, and there aren’t enough oil rigs to keep production and prices in check, Abate said.

Crude oil is trading near $100 a barrel, and Abate noted that oil companies “are extremely profitable at any price above $65 a barrel.” Many of these companies meet Abate’s criteria because they reinvest, maintain high margins, remain financially sound, and profit from a cyclical boom.

“Companies that are maintaining and, in fact, increasing their capital discipline due to this recent selloff are going to be essentially cash flow generating machines for the foreseeable future,” Abate said.

7 Best Stock Picks

Outside of the energy sector, Abate has listed seven of its top stock picks. He said he’s been “relatively selective” in the tech sector and other growth groups, though he sees opportunities. However, Abate has made it clear that the stocks that have sold are not always cheap.

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

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