Value Fund Manager Interview: Picks & Outlook Ahead (NEIMX, CVX, PEG, RTN)

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Last April, Harvey Neiman of Neiman Funds Management, said in an interview that market volatility was going to be the theme for 2011. Rather than trying to predict what would drive the market in 2011, or trying to outguess everyone else, Neiman said that the Neiman Large Cap Value Fund (NEIMX) would stick to investing in the value stocks that he thinks will hold up best in a volatile market.  24/7 Wall St. was given the opportunity to pose some questions to Harvey Neiman, and these are some edited comments from our interviewed questions.

Question: What is your investment process and how do you derive value today?

Our process seeks to uncover value stocks in virtually any market, including the volatile markets of today. The process includes three steps:

  • 1. Screen for financially sound large cap companies with rising revenues, rising earnings, low debt to equity, favorable price to earnings, and favorable price to book ratios.
  • 2. From that group, select only dividend paying stocks.
  • 3. Add a covered call strategy on all stocks in the portfolio, to supplement cash from dividends.

Question: How does covered call strategy help in volatile market?

Our covered call strategy is more art than science. What it does is protect the downside somewhat at the expense of full participation in a large upside. We write calls on about a third of each of the stocks in our portfolio. We track our stocks to see if their movements reflect what the wider market is doing or if a stock is really going down on its own. In the latter case, we may dump the stock, but our loss is buffered by the covered calls we have issued in the past.

Question: When you screen for value, which two sectors are you finding to be the best?

The insurance sector and the consumer products sector present good value today. The energy sector is also displaying several stocks with good value.

Question: What are three of your top value stock picks and why?

We like Chevron Corp. (NYSE: CVX), Public Service Enterprise Group Inc. (NYSE: PEG), and Raytheon Co. (NYSE: RTN). Each of these stocks meets all our criteria (rising revenues, rising profits, low debt-to-equity, favorable P/E ratio and favorable price/book ratio) and each pays a nice dividend. Chevron’s dividend yield is 3.0%, Public Service Enterprise’s yield is 4.2%, and Raytheon’s is 3.4%.

Question: Raytheon seems like a risky recommendation, given the proposed cut of $400 billion in defense spending over the next 12 years.

We think that Raytheon is a good solid value, though perhaps more a tortoise than a hare. Its P/E is around 10 and its price-to-book is less than 2. We’re comfortable with those numbers.

Question: The fund also invests heavily in oil field services stock, which had a blowout year in 2010. This year the sector is doing considerably less well. Do you see some changes to the portfolio because of that?

Because we do a bottom-up analysis of our stocks, we don’t consciously try to overload on one sector or another. We hope for diversity, but we don’t push it. The oil field services sector is still a bread and butter area for us and we’ll stay with the stocks as long as they continue to pay dividends and as long as we don’t feel that they’re hurting our investors.

Question: With second quarter’s earnings season due to start next week, we’d like to know where you stand on second-quarter earnings and what’s your outlook on guidance?

We believe that corporate earnings will continue to show strength as a result of belt tightening, cost cutting, and debt reduction by many well-managed companies. Earnings will not reach record levels, but steady improvement will gradually lead us out toward full recovery — although we still have a long way to go.

Question: Value stocks fell victim to the recession just like the growth stocks, but do you expect them to hold up better than growth stocks and broader indexes (DJIA and S&P500) if the market rolls over again?

Value stocks will definitely hold up better in downside markets and volatile markets, especially stocks in those companies that pay dividends. When full recovery comes, growth stocks will probably be leaders on the upside. But as I said, we still have a long way to go before full recovery occurs.

Question: . Are there any special situations (M&A, spin-off, reorganization, etc.) out there that the market is either discounting entirely or has overlooked?

We assume continued market volatility for the forseeable future. We don’t know what will by the next Greek economic crisis, the next Japan earthquake disaster, the next Egypt or Libya political unrest, or how the politicians in our own country are going to handle the debt ceiling crisis, as well as the continued need for economic stimulus.

Therefore, we choose to stay the course and find good financially sound companies, who pay dividends and control their own debt. Special situations worry us because they involve too many unknown factors, which could be adversely impacted by the volatility flowing from whatever might be the next crisis.

Question: What do you mean when you say that more economic stimulus is needed?

I don’t necessarily mean a third round of quantitative easing. That’s a political question, and I don’t have a crystal ball that gives me any special insight into how that kind of question will be resolved.  But I will say that the future of the US economy depends on creating new jobs in the private sector. That will require capital investment on the part of US companies, and that will create more jobs and more spending.

Interview by Paul Ausick