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2017 ISSUES

October 3, 2017

 

A strong September

The S&P 500 gained 1.9% in September and has now gained 12.5% (excluding dividend) for the year. Peattie Capital portfolios also had a strong month and for the year most are well ahead of the S&P, with gains clustered around +25% net of fees. The best account is up about 40%.

I attribute the outstanding performance to good stock picking, as several names have nearly doubled. Alibaba (+97%) and Align Technologies (+94%) are the best performers, follwed by TenCent (+81%) and Activision (+78%). By way of reminder, Peattie Capital believes in concentrated portfolios, with most portfolios having no more than 25 positions.

What could go wrong?

I've said many times that a 5%-10% correction could happen anytime. In my experience though a full blown bear market (20% drop) typically only happens in the context of a recession, or might be triggered when a significant imbalance corrects. Thus far I don't see either of these happening as a variety of economic data have been steady. The recent GDP report (+3.1%), and employment data are good examples.

As for imbalances, there is a preponderance of margin and credit card debt, and private equity transactions have soared 25% in the first nine months of 2017 to $212bn (Source: FT weekend edition Sept. 30). Neither of these is significant taken alone, but too much leverage/margin can unwind quickly and cause serious pain. I think these items bear watching.

The never-ending headlines about Washington dysfunction, North Korean military activity, tax reform (or not), the next (or same) Fed Chair are real but aren't enough to derail steady economic growth and increasing corporate profitability - at least not in their present form. A spike in yields over 3%, (or an inverted yield curve) would be a red flag, a significantly stronger US dollar would (overall) be a negative, and regulatory reform to the major internet platforms could provide headwinds as well. So far, none of these has happened.

Other signs I've noticed include overly bullish sentiment, extended valuations, and an aging bull market, which, at 101 months, is the second longest on record. I am also concerned about the extraordinary flow of investment money into passive investing and quantitative/algorithmic trading. No one knows what will happen when markets reverse, as these vehicles have all sprung up in the past few years and have yet to be tested in a bear market.

Steady as she goes

There are always headlines and potentially destabilizing macro events, and I think the best approach is to focus on specific names. Broadly speaking I believe that the overall environment for US equities is OK as long as earnings continue to grow. I also think that in a 2% growth world companies with sustainably faster growth are attractive and that the major trends (the internet gobbling up more of our collective attention, for example) are still very much in play.

According to this week's Barrons ("Bears, Return to Your Caves" by Vito Racanelli), in the 29 instances since 1928 when September has made a 12-month high (true in 2017), in the fourth quarter the market has risen 80% of the time, with an average gain of 3.7%. Even better, stocks have gained 5.9% in the fourth quarter when that September high is accompanied by a 12-month advance/decline line high-which is also the case in 2017.

For a few accounts I continue to hold a sprinkling of shorts, and for more conservative accounts I hold various levels of cash depending on specific client profiles.

Stock picking is still a good way to go

Peattie Capital believes that paying the right prices to own the right stocks is a good approach to the market. For some clients, depending on their specific characteristics, I might also overlay a tactical hedging program to protect against material downdrafts which might consist of boxing existing long postions, shorting, or raising cash.

For long term investors, I (generally) agree with Warren Buffett's comment that "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." That is still the approach for most, not all, Peattie Capital clients as difficult as it is sometimes.

Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from September 29.

This chart shows all PCM's recommendations for the past 33 months showing an average return of 31.7%. The total return of the S&P 500 in the comparable period is approximately 28%.

Additional recommendations are available on request. This table does not include speculative
and short sale candidates which are only appropriate for clients who have requested them.

PERFORMANCE OF PCM RECOMMENDED STOCKS

Date
Name
Ticker
Action
Price
Close
Gain
  8/2/16 Broadcom AVGO Buy $250.00 $242.54 (2.6%)
  8/2/16 Heico HEI/A Buy $73.50 $76.20 3.7%
  7/3/16 Independence Holding IHC Buy $21.00 $25.25 20.5%
  7/3/16 Cogent Communications CCOI Buy $40.00 $48.90 23.4%
  4/3/17 CTrip CTRP Buy $49.30 $52.74 7.1%
  3/5/16 AMC Entertainment* AMC Buy $29.50 $20.40 (29.5%)
  2/5/17 Silver Bay Realty* SBY Buy $18.20 $21.50 18.1%
  2/5/17 DaVita* DVA Buy $65.00 $64.76 (0.4%)
  12/5/16 Abbott Labs ABT Buy $38.50 $53.36 40.0%
  11/3/16 Cogent Communications CCOI Buy $37.00 $48.90 36.8%
  10/5/16 AMC Entertainment* AMC Buy $31.50 $20.40 (33.3%)
  7/6/16 Monmouth Realty MNR Buy $13.40 $16.19 26.8%
  7/6/16 Broadcom AVGO Buy $151.00 $242.54 63.7%
  7/6/16 Wells Fargo Pref L* WFC/PRL Buy $1340 $1305 (1.2%)
  6/2/16 Veeva Systems VEEV Buy $33.65 $56.41 67.6%
  4/5/16 LSB Industries* LXU Buy $12.35 $9.75 (21.1%)
  4/5/16 Marine Harvest MHG Buy $15.50 $19.84 40.5%
  3/3/16 KVH Industries* KVHI Buy $9.25 $9.06 (2.1%)
  3/3/16 Howard Hughes Co. HHC Buy $99.00 $117.93 19.1%
  1/6/16 Align Tech ALGN Buy $65.00 $186.27 186.6%
  11/2/15 ViaSat* VSAT Buy $65.50 $66.20 1.1%
  9/2/15 Alphabet GOOG Buy $590 $959.11 62.6%
  8/4/15 DexCom, Inc* DXCM Buy $85 $84.20 (0.9%)
  7/2/15 Cogent Communications CCOI Buy $32.50 $48.90 61.3%
  6/2/15 Express Scripts* ESRX Buy $86.00 $81.55 (5.2%)
  5/4/15 Align Technology ALGN Buy $59.00 $186.27 215.7%
  3/4/15 Sabre Corp* SABR Buy $21.60 $26.57 25.5%
  2/5/15 Cogent Communications CCOI Buy $38.50 $48.90 37.9%
  1/5/15 Monmouth Realty MNR Buy $11.60 $16.19 54.5%
   
 
NOTES: Gains include dividends. All numbers are unaudited.
The risk of loss always exists, and past results
are not necessarily indicative of future results.
*Position sold at manager's discretion

Recommended stock: NGL Energy Partners ("NGL")

Shares of NGL (technically "units") have fallen from $43 two years ago to below $9 in early August on delayed/missed earnings and overexposure to underlying commodity prices. On August 29, NGL announced a $15mm buyback program, and shortly therafter the CEO purchased units as well. When I see that much insider activity I get curious, and I've concluded that NGL presents a very attractive risk/reward profile at current prices.

The company has been selling off non-strategic assets and also issued preferred shares with proceeds (in both cases) used to reduce debt. I expect more restructuring-related announcements in the next few quarters and the company has stated (Source: company documents) they will generate an increasing amount of revenues and earnings from fee-based, longer-term contracts. The dividend has already been cut (from $0.64 to $0.39 quarterly) and currently yields 13.1% (comparables are 5%-6%). The company anticipates a 1.3x dividend coverage ratio.

Units have already jumped about 30% since the CEO's purchase, but I think there is still value here based on the discount to the peer group and I recommend buying shares anywhere near these levels. For measurement purposes I will use yesterday's closing price of $11.90.

Please don't hesitate to contact me with question or comments and just let me know if you'd like to be removed from distribution.

CLOSE THIS ISSUE


September 1, 2017

 



August 2, 2017

 



July 3, 2017

 



June 5, 2017

 



May 2, 2017

 



April 3, 2017

 



March 3, 2017

 



February 3, 2017

 



January 4, 2017

 



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