Value investor says earnings recession is coming

Published Mon, Jun 1 20157:31 AM EDT

Delphi Management founder Scott Black says he fears an earnings recession may be on the way. "I wouldn't be surprised if corporate earnings would be negative for the year," said Black, noting that S & P 500 earnings declined 5.6 percent in the first quarter, while sales dropped 1.8 percent. The value investor, who uses a "bottoms up" approach, says the S & P 500 is already "fully valued" at 18 times this year's earnings, while small- and mid-cap companies are "overvalued," trading at 22.5 times and 21.7 times, respectively. Here are changes Black is making for the CNBC "Squawk Box" Portfolio Challenge . Despite weak earnings and what he says are stretched valuations, Black believes the Fed's actions will continue to support the market somewhat. Read More McDonald's, other stocks hedge funds are buying "Ironically, because nominal interest rates are so low, I still think U.S. stocks will rally during the remainder of the year," Black said. Contrary to popular belief that the Fed will raise interest rates later this year, Black says that will not be the case, because the economy remains on loose footing, leading stocks to continue to climb. In this slow growth environment, Black sought to combat that through the purchase of Super Micro Computer, a networking and communication devices company. To fund that transaction, he is selling Customers Bancorp . Below are his thoughts on why he is going long Super Micro Computer, while keeping the rest of his holdings. Super Micro Computer (SMCI) This is a play on the cloud space, with exposure to Facebook The company is growing its top line consistently (20 percent last quarter) Trades at a multiple of 12.8 times There aren't many tech companies growing their top line at that rate with such multiples Has excess cash on its balance sheet Lam Research (LRCX) Lam Research is making money in the space It has lots of cash sitting on its balance sheet This is a play on 3-D technology Trades at 12.5 times earnings, which is very good for a tech company It has zero debt, and a solid management team Actavis (ACT) I think this stock could go to $400 [implying a 30 percent move from here] Management is doing a great job The stock is on a strong uptrend, and has already gained 44 percent in the past 12 months Read More Right on bull, Birinyi sees 6% gain from here Squawk Box's inaugural Portfolio Challenge gave 14 fund managers $100,000 to invest over 2015. For the current rankings, click here . Disclaimer

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Brendan McDermid | Reuters

Delphi Management founder Scott Black says he fears an earnings recession may be on the way.

"I wouldn't be surprised if corporate earnings would be negative for the year," said Black, noting that S&P 500 earnings declined 5.6 percent in the first quarter, while sales dropped 1.8 percent.

The value investor, who uses a "bottoms up" approach, says the is already "fully valued" at 18 times this year's earnings, while small- and mid-cap companies are "overvalued," trading at 22.5 times and 21.7 times, respectively.

Here are changes Black is making for the CNBC "Squawk Box" Portfolio Challenge.