John Flynn reversed his fund's fortunes to crush the stock market with a 72% 12-month gain, and says he's just getting started. He told us exactly what he bought and how he finds the right stocks.

John Flynn reversed his fund’s fortunes to crush the stock market with a 72% gain, and he’s just getting started.

John Flynn fund has returned 72% to investors over the last year, according to Morningstar.

That roughly doubles the performance of the S&P 500 index over the same period.

Flynn told Insider about the “pain” he likes to invest in, including where he finds value in tech.

It’s easy to make a case for a good stock that’s worth more than the public thinks. It’s tougher, even if it’s more honest, to admit that a company is cheap because it’s having real trouble.

“The only way you really can get a good business at a substantial discount is something has to be wrong,” John Flynn of Pzena Investment Management told Insider in an exclusive interview. “You have to go to where the pain is.”

Over the last year he’s been especially successful at turning that pain into gains. According to Morningstar, Flynn’s John Hancock Classic Value Fund has returned 72% to investors over the past 12 months, which doubles the return of the S&P 500. Kiplinger data shows that only two large-cap funds performed better over the year ended September 30.

That was a dramatic end to a sluggish period for the fund, which had slightly trailed its benchmark and competing funds over the course of the past decade, according to Morningstar data. Flynn says that according to earnings metrics cheap stocks remain extremely cheap, and he thinks that will be the basis of a long comeback.

“Once you’re looking out a few years, you’re looking at low double-digit earnings yields for the portfolio. We think that still is a very attractive investment profile against the opportunity sets in the marketplace today,” he said.

Flynn explains that he and other fund managers at his firm, which managed $50.8 billion in wealth at the end of the third quarter, start by looking at the cheapest stocks based on metrics like price to earnings. From there, they decide which ones will overcome their problems and which ones won’t.

“Then we systematically research the issues and make a decision whether the issues facing the company are temporary or permanent,” he said “In the cases where we deem them to be temporary and the valuation remains compelling, those are the candidates to go into the portfolio.”

One of the most pain-riddled companies in recent market history is General Electric , which bounced from crisis to crisis as it dealt with fears about its financial liabilities, cut its dividend, slashed jobs, sold off numerous businesses, lost its longtime CEO, and went through an ill-fated combination with Baker Hughes, among other problems.

“We’ve been around 25 years, never was GE hitting our screens as a stock,” he said, adding that the portfolio is somewhat heavy on industrial companies right now because of the combination of a near-industrial recession in the US that ended just as the pandemic started.

GE is now the firm’s largest position. Flynn says the company’s power business will stay viable and that its liabilities are under control, while its aircraft business should help the stock rally further.

“They’ve got a fantastic aircraft engine business. Profits are driven by maintenance,” he said. “And maintenance is a function of miles flown. And while we’ve seen a recovery in some air travel, we certainly have a ways to go. And as that ramps back up, that’s a meaningful earnings driver for GE as those earnings come back.”

Wells Fargo also endured a long run of bad headlines connected to its fake-account scandal . But Flynn argues that the business is still working, and that things will improve in the near future as the company gets back to “growing and playing offense.”

Banks, too, are heavily represented in the fund. But even though those are considered traditional value stocks, Flynn says the portfolio won’t always look like that. He says the cheapest stocks from the pandemic period are starting to grow out of his target range, and they’ll be replaced.

The amount of tech already in his portfolio might be surprising. He says that HP Enterprise has seen its business disrupted by the cloud, but the company itself is still successful even if it’s no longer hot.

“It’s still a very nice business. It’s not a huge grower, but a very attractive valuation in a good niche in the business and the industry,” he said.By the same token, he says Amdocs gets overlooked but is a highly appealing investment.”They do your cell phone […]

source John Flynn reversed his fund’s fortunes to crush the stock market with a 72% 12-month gain, and says he’s just getting started. He told us exactly what he bought and how he finds the right stocks.

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