How to Chase Value During a Bull Market

Some value investors have held their own by updating their strategies in this upbeat market.

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Value investors like it when markets are dull and stocks are a bit out of favor. But during a bull market, it's a tough way to make a living: Even the master of value, Warren Buffett's Berkshire Hathaway, has been trailing the market over the past three years.

Still, some value investors like James Roumell, lead manager of Roumell Opportunistic Value Fund and president of Roumell Asset Management, have held their own by updating their strategies to reflect the undoubtedly upbeat market.

That involves some unusual moves, including taking relatively short-term positions in well-known stocks, most notably Apple, as well as smaller, long-term buys of virtual unknowns like mining name Sandstorm Metals & Energy. The results reported so far this year have been promising. In the most recent shareholder disclosure for the 52 weeks ended March 31, Roumell's flagship Opportunistic Value Fund reported a total return of 21.05 percent. During the same time period, Standard & Poor's 500 index gained 13.96 percent.

[See: Mutual Fund Scorecard: How 6 Famous Fund Managers Stack Up.]

Not that Roumell's preferred investments in stocks whose value has been overlooked are easy to come by. Overall stock valuations, he says, remain relatively high, leaving fewer underpriced assets. "It's why we are holding 35 percent [of the fund's assets] in cash," he says. To gauge the market's value, he uses a rule of thumb that Buffett often cites, comparing the value of the Russell Total Market Index, which includes 98 percent of the market capitalization of U.S. traded equities, to gross domestic product.

By that measure, stocks look pricey. The average total stock market value to GDP since 1970 has been 65 percent of GDP. It's about 100 percent now. Still, that's far below the nearly 200 percent in 2000 when Roumell took a timely exit from many of his holdings, and the fund showed positive returns in that downturn signalled by frothy stock prices.

Where is "value" now? Roumell's strategy has shifted to include a series of shorter-term, event-driven moves, as opposed to the deep-value plays he might pursue at other times. "There are instances where the herd goes so fiercely negative it builds on itself, and those situations are exploitable," he says, but "only for a 25 percent to 30 percent upside."

There, success has been mixed. He began buying Apple around the time it dropped from $700 to $500 in late December and early January. But so far, Apple shares he bought at an average price of $506 have been losers. Apple is near $450 now, and in an April statement, Roumell's fund reported a loss of 16 percent on the investment so far. He still considers Apple a value because minus its large cash holdings, its stock price is extremely low in relation to earnings.

That investment and others by less-common Apple investors caught the attention of Wall Street investors, who thought it might be another signal that the stock had hit bottom if value investors were buying. Hedge fund manager David Einhorn made a much-noticed acquisition of more than a million shares. Whether such bets will pay off remains to be seen.

Roumell, who draws outsized attention for his relatively small $300 million in funds because of its large returns in the value sector, has managed a 10.67 percent annualized return since the firm's 1999 inception, versus 3.62 percent for the S&P 500. His firm has also outperformed the Russell Value index by an average of about 2 percentage points per year over that span. The firm's cumulative 324.22 percent return compares with 238.09 percent for the Russell Value index and 65 percent for the S&P 500.

[Read: Are the Industry's Top Fund Managers Beating the Market?]

Another of Roumell's event-driven ideas has been a large position in the debt of struggling retailer J.C. Penney, a company long targeted by hedge funds as a turnaround play. Instead of buying the shares, Roumell bought its debt, which pays 8.85 percent yield.