Wondering how to invest in stocks and mutual funds amid a grim market? Look at $705.8 million Invesco Comstock Select Y Fund (CGRYX). The fund is doing so well this year that it is doubling down on its strategy.
The fund has soared to a 7.19% return this year going into Thursday. That's about 20 percentage points better than the S&P 500, which has tumbled 13.10%. It's also well ahead of the 2.02% setback averaged by its own large-cap value rivals tracked by Morningstar Direct.
How long might this fund's winning streak continue? Over the long run, the managers say they can keep finding undervalued stocks.
How To Invest In Stocks
So the managers are flexing their strategy. The fund notified the Securities and Exchange Commission in November that it is giving up its status as diversified. "The reason to go nondiversified is that it gives us more flexibility," said lead co-manager Kevin Holt, who is also value chief investment officer of Invesco. "We can take bigger positions in our best ideas."
Holt along with lead co-manager Devin Armstrong and senior client portfolio manager James Warwick generally plan to hold 20 to 22 positions. That would be down from about 30 positions now.
As for the strategy itself? When it comes to how to invest in stocks, this fund is a deep value portfolio. Holt said, "We wait to buy stocks when they are trading at a discount. We tend to be early in, early out. Also, we're contrarian and very patient."
As for their macro view, the fund managers' ballpark guess for when the market will bottom and commence its rally is roughly mid 2023.
Low Valuation, High Potential
Exxon Mobil illustrates this fund's approach to how to invest in stocks.
The fund is trimming its overall energy weighting. But the integrated oil and gas major's 88% gain in share price this year reflects management's focus on generating return on invested capital, Holt says. In the prior energy cycle, too many managers focused on production growth at the expense of returning value to shareholders, Holt adds.
Meanwhile, Holt and his teammates like Exxon Mobil's multiple. Shares trade at nine times next year's earnings vs. 19.65 times for the S&P 500. And the energy giant pays a dividend yield of 3.3%. That's roughly double the big-cap bogey's yield. "And now, with changes on its board (of directors), the company is more focused on efficiency and getting its cost structure in line (with its industry)."
In addition, at a time when supply production industrywide is lagging, Exxon Mobil has a promising new field. "They have a major new project in Guyana that came online last year," Holt said. "It will grow for years. It's quite attractive from a cost basis and returns basis. And oil prices will be high for a sustainable period."
How To Invest In Stocks: Hobbled By Scandal
Wells Fargo also shows the Invesco Comstock Select Fund's approach to how to invest in stocks. The giant financial firm has been hobbled by a series of controversies. It has paid fines for the creation of unauthorized bank accounts and credit card accounts. It was also disciplined for forcing customers to pay for unneeded auto insurance or charging unnecessary mortgage fees.
Those missteps have depressed the firm's share price relative to its peers, Holt says. Meanwhile, Holt sees catalysts for the stock. "Charlie Scharf (CEO since September 2019) has rationalized the company's portfolio, sold underperforming assets and fixed government concerns," Holt said.
Once regulators are satisfied that the banking firm has improved its governance and risk controls, the Federal Reserve is expected to raise the company's asset cap, expanding its ability to make loans. "That will give them the ability to accelerate growth," Holt said. "In turn, that understates their earnings power."
Earnings per share are seen hitting $3.75 this year vs. last year's $4.35, according to analysis by MarketSmith. Once the bank addresses its issues, normalized earnings should be in the $6 to $6.50 range, Holt says.
Prognosis For Merck
If you want to emulate this fund's tack when it comes to how to invest in stocks, look how it views Merck. The drugmaker is up 46% this year. But last year it surrendered 0.68%. Holt said, "It got overly discounted last year on concerns that it had just one major product, Keytruda (which is a cancer drug). And in 2029 it will go off-patent."
Holt and his colleagues began their position on July 29, 2021 when Merck was sliding sideways. "We felt there is a lot of time until 2029," he said.
And the managers like Merck's prospects for coming up with products that can drive the company's revenue and earnings. "So we still like Merck selling at 14 times earnings with a 2.6% dividend yield," Holt said. "Half of Merck's story may be played out. But there's still quite a bit to like." Now Merck is trading around 110.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best actively managed mutual funds.
