Muhlenkamp Fund has returned an annualized 22% over the past three years.

Jeff Muhlenkamp, manager of Muhlenkamp Fund  (MUHLX) – Get Free Report, likes value stocks with strong performance.

The fund has returned an annualized 1.89% over the past year, 22% over the past three years and 9.72% over the past five years, according to Morningstar. That beats the S&P 500 for the three-year period and trails it for one and five years.

Muhlenkamp sees weakness for the stock market in coming months, thanks to Federal Reserve interest-rate hikes and a slowing economy. Energy is one of the few sectors that he finds attractive now. He thinks value stocks currently have an advantage over growth, and large-capitalization stocks have an advantage over small cap.

Here are Muhlenkamp’s comments in an interview with TheStreet.com, including stock picks.

TheStreet.com: What’s your investment philosophy?

Muhlenkamp: Find companies worth more than what they’re selling for and invest in them as long as that’s true. We scan 2,500 companies per quarter, filtering for return on equity and inflation. That tells us what the company is worth. Then we try to understand the company.

TheStreet.com: Where do you see stocks headed in the next year?

Muhlenkamp: The general direction is down. A bear market began in 2021 after the bubble burst for profitless technology and crypto. And then the bubble burst for bonds last year.

This year, there has been a bounce in all those areas, [pushing stocks higher]. But the Fed is still raising interest rates, and economic indicators are looking worse. It’s a muddled picture, but in the short term, the market comes down.

TheStreet.com: What industries do you find appealing now?

Muhlenkamp: Energy. Past that, they’re hard to find. There was an overinvestment in shale oil through 2017. Then oil prices went negative early in the pandemic and the industry has consolidated.

The survivors vowed to become profitable, so there was underinvestment. Now we have to explore [for oil]. The oil price will be high enough to make operations profitable. That will push producers to reinvest in inventory. And you can get hydrocarbon companies with prices at only 6 to 8 times earnings.

The areas to avoid are profitless technology companies and banks. For banks, declines in the values of their assets, triggered by rising interest rates, will haunt them for a while. And money-market funds act as competitors for their deposits.

In addition, [many banks hold commercial real estate loans], and there are a lot of indications that commercial real estate is headed down.

TheStreet.com: Do you think the current environment favors value more than growth?

Muhlenkamp: I think the fascination with profitless growth died when interest rates rose from zero. It probably won’t return for another four to five years.

Value has the advantage. That’s because for investors like pension and sovereign wealth funds, if they can get 6% to 8% returns with less risk, they’ll do that. Speculative investments won’t do as well, except those with strong businesses.

TheStreet.com: Is the outlook better for large-cap or small-cap stocks?

Muhlenkamp: What’s important is the need for funding. Small-caps rely more on banks. With the banking industry under stress, it’s a little more expensive for small-caps to access capital. The advantage goes to large-caps that can access debt.

TheStreet.com: What are some of your favorite stocks?

Muhlenkamp: 1. Schlumberger  (SLB) – Get Free Report, the biggest oilfield services company in the world. It should have another three to four years of profitability, with Mideast and offshore production leading the way.

2. The oil-pipeline exchange-traded fund Alerian MLP ETF  (AMLP) – Get Free Report. Pipelines have dividends of 6% to 9%. [The ETF has a trailing 12-month dividend of 7.62%.]

3. Kirby  (KEX) – Get Free Report, a domestic barge operator. Barges were overbuilt a few years ago, and then utilization tanked. None was built for five years, and now usage is coming back. Profitability is returning, and they say good conditions will continue for three to five years.

4. NMI Holdings  (NMIH) – Get Free Report, a mortgage insurer. It sold off going into the pandemic. It hasn’t really bounced back, even though housing has. It’s selling at 6 times earnings, which is attractive. 

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