A stock portfolio can be hedged in a number of ways, from holding bonds to taking short positions, betting that a security's price will fall.
Joseph Artuso, co-manager of 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.
That tops the average for the research firm's long-short equity category for all four periods.
We recently spoke to Artuso about his strategy. He said that short positions are meant to manage risk – the risk of the long positions. The fund uses options and ETFs to establish the shorts.
The fund is overweight energy, materials, and information technology.
TheStreet/Easterly Investment Partners
Investment philosophy of Easterly's Joe Artuso
TheStreet.com: What’s your investment philosophy?
Artuso: We believe in a well-diversified portfolio of companies with safe, excellent returns. It’s companies where the price is depressed, and we feel that [in the] long term the stock will be re-rated [based on the change in the perception of the company]. We try to take advantage of investor overreaction. It’s a classic value approach.
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TheStreet.com: What’s the attraction of having long and short positions in your portfolio?
Artuso: The shorts are generally based on pair trades with long positions, and sometimes we short a stock on fundamentals. It’s risk management. We can hedge macro and industry risk, reducing our equity exposure.
In pair trades, we may have a favorable view of a company, but it could be in an industry with a temporary dislocation of sentiment. So we want exposure just to the single company. We could short an index ETF covering the industry or short another stock in the industry if we have a less favorable view of it.
TheStreet.com: Can you discuss some of your options activity?
Artuso: We sell call options against names that are working but are reaching the late innings of our investment themes. [Call options give an owner the right, but not the obligation, to buy a security at a preset price and by an established date. Option sellers receive a premium payment from option buyers.]
Selling the options generates income for us. We’ll short the overall market or an index using options and ETFs. Now, with the market trading 20 times forward earnings, driven largely by the 10 biggest names, we’re short a lot of index options and ETFs.
TheStreet.com: What are some of your favorite industries?
Artuso: We’re overweight energy, information technology, and materials. Energy is the cheapest sector in the market at 12 times forward earnings. It has some of the best balance sheets and free-cash-flow yields.
We think energy demand will increase over time. China and India [have a lot of room for such growth,] as their middle class expands. There will be a lot of demand for fossil fuels despite a plateauing of the demand in the developed world.
As for IT, artificial intelligence is what’s driving the market over the last year. We’re finding value related to AI in legacy technology companies — data software, IT services, and cybersecurity.
TheStreet.com: Are there any industries you dislike?
Artuso: We don’t build our portfolio that way. We are generally taking a short position to be paired with a long position. That being said, we are underweight industrials, consumer staples, and finance.
Stock picks from Easterly's Artuso
TheStreet.com: Can you discuss three of your favorite stocks?
Artuso: 1. We own Suncor Energy (SU) , a Canadian oil and gas producer focused on oil sands. It’s a big turnaround story. It has many years of missed production goals, higher-than-expected costs, and, worse, a very bad safety record.
They installed a new CEO, Richard Kruger, in early 2023, and he has led a turnaround. Last year was the second highest in company history for production, and Suncor increased its dividend.
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It’s still a show-me story, but the stock trades at a significant discount to its global peers.
2. Gold (BTG) , a Canadian gold miner. The stock hasn’t responded to record high gold prices. It has underperformed gold-miner indices over the past three years.
There is a new mining code in Mali, home to more than half of the company’s production. There is uncertainty about the operating environment.
But B2Gold has been successful over the past 20 years going into controversial geographies. It’s more geopolitical concerns in Mali than operational ones.
Management is confident it can reach a solution on 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’s a global leader in biopharmaceuticals. Last year’s purchase of Horizon Therapeutics gave it exposure to the rare-disease segment.
Only 5% of rare diseases have medicine, so there’s plenty of room for growth. Amgen can leverage its sales and distribution model for rare-disease drugs. Horizon didn’t sell its drugs internationally, but Amgen will.
It’s also working on obesity drugs, which could roll out in 2028. At 13 times earnings for Amgen, not a lot of value is being ascribed to its obesity portfolio. The multiple should go higher.
The author owns shares of Amgen.
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