8 Value Stock Picks to Buy Now As Growth Lags: Top-1% Fund Manager – Business Insider

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  • The Frank Value Fund has gone from a market laggard in 2021 to a leader this year.
  • Portfolio manager Brian Frank shared the key changes he made to his strategy, which catalyzed a resurgence into the 99th percentile year-to-date.
  • Frank shares eight of his favorite value stocks to buy now.

Before Brian Frank’s bounceback this year, he had to do some soul-searching.

The portfolio manager, who’s managed the eponymous Frank Value Fund (FRNKX) since 2004, was coming off a year in which he finished near the back of the pack for his peer group, according to Morningstar. His fund’s 6.4% return lagged far behind the 23.7% gain of its benchmark.

When asked in a recent interview with Insider if he ever lost faith in his strategy, or value stocks broadly, Frank’s answer was, well, frank.

“We definitely took a hard look at the strategy and tightened up a lot of those catalysts,” Frank told Insider. “We found that just buying a company that’s cheap isn’t enough anymore in the modern market. You really have to have management, or the company itself, just, like, focused on closing that valuation gap.”

Frank’s revamped strategy is working wonders. His fund is now in the top 1% of its category this year, according to Morningstar, thanks to a 3.7% rise compared to the index’s 12.4% loss.

Here’s how Frank refreshed his process and went from lagging in 2021 to leading in 2022. The portfolio manager also shared eight of his favorite stocks right now.

From near-worst to first: How the turnaround happened

In a sea of value funds, Frank said his portfolio separates from competitors for several reasons.

First, the portfolio manager said he’s keenly focused on “absolute value,” meaning that his aim is to find firms with valuations that are attractive on their own, not just relatively cheaper than their peers. He does this by hand-picking stocks instead of using an algorithm or quantitative model.

While all of the stocks in Frank’s fund are listed on US exchanges, many don’t fall into major indexes like the S&P 500, he said, adding that about 80% are small or mid caps. There are three reasons why Frank likes smaller names: they tend to grow faster, serve as targets for mergers or acquisitions, and be more volatile, which can lead to buying opportunities.

But, as Frank has learned the hard way, just because a stock is on sale doesn’t mean it’s cheap.

“We do screen for cheap stocks, just like every other value investor, but there’s a lot of value traps there,” Frank said. “You have to be really careful.”

So-called value traps are when a stock is cheap for a reason. Traditional valuation metrics may suggest that the stock is a good deal, but its poor fundamentals keep shares from rebounding.

The biggest change between Frank’s strategy this year compared to 2021 is that he discovered the secret to spotting value traps: finding and avoiding companies with lackluster management teams. In theory, management’s goals should be aligned with those of shareholders, but Frank said that if executives don’t own much of their company’s stock, that isn’t always the case.

“We went back and saw which ones weren’t working, and they were the ones that didn’t have that catalyst or that management team just really working to close the valuation gap there,” Frank said.

Frank added: “And just that slight change, it does two things: it boosts your performance because you have things that are working to get back to fair value, and then it also avoids some losers or flat stocks of companies that just are kind of value traps.”

Two tell-tale signs of subpar management teams are those that compensate themselves too richly and don’t make mergers, acquisitions, or other value-adding moves, Frank said.

“You can find a stock that has a lot of cash, but if management doesn’t want to give you that cash, there’s nothing you can do about it,” Frank said.

Frank also said he looks for companies that have wide competitive moats and possess high-quality attributes like strong balance sheets and healthy financials.

“We have metrics that don’t move, and some of them are based on cash flow, but, also, some of them are based on quality,” Frank said. “So we do research on high-quality companies, and we just keep a wish list. And we’ll have alerts come up when they start trading a valuation that’s reasonable to us, that’ll actually generate a good return going forward.”

8 value stocks to buy

Value stocks have outperformed this year as once-high-flying growth stocks tumble, but Frank believes that valuations are still rich, as measured by the market cap-to-GDP ratio that’s often called the “Buffett Indicator.” But while selectivity is still warranted, there’s still value out there.

“You need to be very careful here,” Frank said. “I wouldn’t broad-based buy equities at these valuations. You really need to pick around that, which I think we’ve done.”

Below are eight of Frank’s favorite stocks to buy and hold, along with the ticker, market capitalization, price-to-earnings (P/E) ratio, and thesis for each. The first three picks were sent to Insider via email, and the last five were discussed in a phone interview.

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