Here we are, six months into our pivot away from chasing purely “cheap” stocks into a more balanced total return strategy. This is the kind of season that proves that what we’ve been doing pays off.

Consider the raw numbers: counting dividends, the new Value Authority has delivered a little over 2% YTD, which looks like small stuff until you stack it next to the NASDAQ (down 8% over the same period), S&P 500 (down almost 5%) and the blue-chip Dow industrials (down almost 2%).

They went down. Those shareholders lost money. As a group, our stocks not only resisted the undertow currently afflicting the market (more on that in a moment) but their shareholders are ahead. We made money in the past three months.

And 2% in three months doesn’t look like a windfall in itself . . . but when you can reasonably extrapolate the cash flow across longer periods, it gives us the number we need. Never forget that the S&P 500, with all its rollercoaster boom-and-bust cycles, has “only” delivered an 8-11% annualized return across its entire history.

If we can come close to that number with less volatility, greater confidence and fewer sleepless nights, we’re winning. Value Authority is not where we go for home runs. Swinging for the fences never aligned with our old approach anyway, so it was a little quixotic to even pretend.

After all, the market may have its mood swings, but across the cycle it’s almost vicious in its efficiency. While stocks that trade at a discount look attractive on a pure mathematical basis, they’re unloved for a reason. Sometimes they disappointed shareholders and word of mouth has gone negative. Sometimes they’re simply starving for capital because all the hot money is focused elsewhere.

Whatever the reason, it takes time and tangible progress to overcome the prevailing narrative, earn a little of Wall Street’s love and rally hard enough to close the valuation gap. Until that happens, the gap persists, the stock stays unloved and shareholders who believe can find their faith and their patience tested.

Great companies make sure to find ways to give those shareholders incremental rewards in the meantime, providing valuable support to that patience while keeping cash flowing back to our accounts even if the stocks themselves stay stalled for months or years.

This is part of our pivot to undervalued companies that pay attractive dividends. Otherwise, every day we spend parked in stalled stocks could be more profitably spent huddled in the no-risk comfort of Treasury debt, which currently pays a yield of 4.0% to 4.7% a year depending on the instrument.

And with that as the risk-free rate we compete against, I’m pleased to say that the Value Authority is now paying a healthy 6.4% a year as a reward for our patience while we wait for the stocks to achieve their real potential. We’re beating bonds by up to 2.5%, which is nice.

But it’s only a floor. The stocks have to do well in the foreseeable future as well in order to compete against the go-go growth names in the Magnificent 7 and elsewhere. Sure, growth is where the home runs stack in the long haul . . . but sometimes you want a smoother ride in the here and now.

Of course it’s always a work in progress. We’ve cut a lot of so-so stocks in the last six months and rotated into much higher dividends to lock in opportunities as they arise. That work continues.

And a few stocks currently on the list have taken well over a year to give us even a low double-digit return. That’s what I mean when I talk about the way deep discounts sometimes take a long, long time to resolve. Longer than we realistically need to hang around if the dividends aren’t coming.

HON has been a real bulwark, but it’s also taken its time coming back from its plunge early last month. It’s been our friend. However, even another couple of months on this trajectory might recoup another 4 percentage points.

That’s OK. But there are opportunity costs to think about. If we hang around in HON, will we be turning our back on something with a reasonable shot at delivering a better outcome? And is there another name that we should cut first?

I think so. We’ll talk about it at the end of this newsletter. First, however, I’d like to run through the “reasons” behind the market’s sudden correction . . . one of the ten fastest in history, apparently.

Persistent inflation is not really the problem. The Fed’s pause is not even the problem. We knew price pressure was sticky and that Powell and company were unlikely to keep handing out big rate cuts like candy.

Mature investors know that life can and does go on in a non-zero-rate environment. We’ve survived higher interest rates in recent memory and survived. The fact the the Fed is even considering another cut or two this year should fill Wall Street with hope and enthusiasm.

The fact that it doesn’t isn’t our problem. We can’t make decisions for other investors even when we think they’re being irrational. All we can do is maintain the courage of our convictions as long as we can while we wait for sanity.

And this is not really about tariffs in themselves. Everyone on Wall Street and on Main Street has known since November that tougher trade policy was coming, so pulling the plug four months in doesn’t really feel like the smart response.

We don’t know the economic impact. GDP growth could slow down or even go negative for a bit. But that’s always a shadow on the market . . . we brace for at least a minor recession every 2-3 years and are grateful when they come less frequently.

What we know right now is that there’s very little shadow on earnings. Some companies are going to need to make tough choices, but on the whole we seem to be in the early stages of a profit boom that could last for years without slowing down.

Everybody can see this. Demand for stocks before they enter the core growth cycle has been high. And I think that’s really what drove this correction: Wall Street’s tolerance for high valuations has gotten narrow.

We’ve seen that investors are comfortable buying the market at 20X forward earnings right now but 22X makes buyers skittish. At that level, potentially bearish scenarios multiply until they become self-fulfilling prophecies and the market takes a step down.

And then Wall Street has always climbed that wall of worry and gotten back to work. Always.

So where are our stocks? As we discussed, HON took a major step down last month and is taking its time clawing its way back . . . but PEP is on the verge of a breakout rally and WEC keeps pushing from high to high.

These names don’t offer a lot of yield, but they’re the best companies left from the previous methodology. While we will eventually want to rotate into something where we can lock in a better dividend, there’s little urgency as yet.

KMT, on the other hand, took a shot at clearing $22 and now seems more likely to retest below $19 before getting back to work. This is the kind of business that could become collateral damage in a trade war . . . and in the scenario that the global economy cools, this is also where it hurts first.

Granted, the yield here is slightly better than what we’re getting on HON, but at least HON is on an upward trajectory. Time to let KMT go.

Our higher-yield group, on the other hand, is doing extremely well as investors try to lock in cash flow on companies we bought months ago. I’d like to add another to the list now to replace KMT.

Annaly (NLY) is one of the biggest mortgage real estate companies, owning $70 billion in home loans compliant with government agency standards. It’s also one of the biggest portfolios of mortgage servicing rights (MSRs), which aren’t the loans themselves but still generate significant revenue for companies willing to collect payments, send out statements and so on.

The business is not sexy and occasionally the stock takes a hit when people start worrying about the housing market. For our purposes, though, it’s all about the dividends.

Real estate stocks like this need to pay at least 90% of their profit to shareholders every quarter. In a conservative scenario, I think NLY can pay at least $0.60 per share for the foreseeable future . . . management is actually optimistic that results this year will be significantly better than that.

Here at $20.50 or so, that base case lets us lock in an 11.7% yield. Swapping NLY in for KMT raises our overall yield by almost an entire percentage point. I’d like to take the opportunity.

Buy NLY below $21. While book value of the loans right now is only $19.15, those MSRs create a dynamic business in their own right and justify a slightly higher stock price.

We don’t need NLY to climb high. I’d be happy to see shares hit $23 once in a while. The important part is that yield . . . ideally coming in quarter after quarter, year after year, as long as it takes to find something even better.