August 30, 2020
2020 continues to be a most unusual year, and the most consistent question I get is how the "market" has managed to be so strong in the face of so much bad news and uncertainty. My answer is that Peattie Capital believes in a "market of stocks" not a "stock market". Said differently, over time, owning the right businesses will provide the best chance of investment success and I recall Warren Buffett's comment that temperament, not intellect, is the most important attribute of the successful investor.
Through August 28 it's been another terrific year for Peattie Capital performance-wise, with net returns ranging from 11% to 33%, and most accounts clustered around gains in the high teens, about double the S&P 500's total return of approximately 9.5%. Please note that past performance is not a guarantee of future returns.
"If you don’t take change by the hand, it will take you by the throat.” Churchill
I couldn't agree with Churchill more, and among the best decisions I've ever made for Peattie Capital clients was to emphasize disruption/change about five years ago. I expect to continue to focus on companies/industries that are undergoing massive (or "jagged") change. According to an August 18 Lex column in the FT ("Tech rally: pricey party) average sales growth across the S&P 500 has fallen to zero, whereas revenues at the largest software companies are expected to grow 17% this year, and much of that revenue (83%) is recurring.
To be sure, some tech names are trading at extreme valuatuions (30x sales, for example), and questions have also come in about "taking some off the table." Selling Amazon or PayPal might feel good for a minute or two, but doing so will not only create a massive taxable gain, but also raise the question as to when to get back in. Overall, I remain comfortable owning names that I believe will be longer term winners.
No doubt there will be pullbacks and volatility, but the recent earnings season was good, and bonds are still "return free risk" as far as I'm concerned. So for now, I maintain that digitization and the massive enterprise-wide infrastructure overhaul to the cloud is a good place to be. Allocating some portion of investable assets to disruption/change is a very good idea.
Some of the other questions I've been asked recently by clients/prospects
Will we go back to normal?
I think some areas will eventually go back to what they were before Covid, such as leisure travel/tourism. However, other trends have accelerated, and will remain in place. Shopping and banking online come to mind. I don't think office buildings will be as crowded as they were, and commercial real estate firms and the banks that have exposure to them, are "no fly" zones for the time being.
Who knows what other changes we might see? The retailer REI decided to sell it's brand new (and unused) headquarters building on eight acres in Bellevue, Wa. In announcing the decision, CEO Eric Artz said “The dramatic events of 2020 have challenged us to reexamine and rethink every aspect of our business and many of the assumptions of the past. That includes where and how we work. As a result, our new experience of “headquarters” will be very different than the one we imagined more than four years ago.” I believe more companies will rethink the idea of traditional headquarters.
Who will win the election?
I don't trust the polls, and as far as I'm concerned, a lot can happen between now and November. I'm curious about how the House and Senate turn out, but not really concerned about how the market will perform under a Democratic administration. Historically markets have been able to perform equally well under either party.
I think the underlying trends that are shaping (well, reshaping) society are becoming more deeply entrenched, and that will continue regardless of who's in the White House.
With all this liquidity, wouldn't you expect to see inflation? If so, would that be bad for the markets?
That's a reeeeaalllly good question and I don't have an answer as to why inflation has been dormant. Chairman Powell's recent policy change to accept/encourage higher inflation suggests to me that interest rates will remain low for an extended period of time. Inflation would likely drive up interest rates, and yes, I think broadly speaking that would be a headwind for equities. Predicting the direction of interest rates is waaaaaay beyond my ability, but today's absolute level of rates and the shape of the US yield curve suggest inflation isn't a concern right now.
Did you see (sic) what Cramer said about covid and non-covid stocks?
No, I didn't. I don't watch (or listen to) financial mainstream media. I consider it entertainment, not analysis, and it doesn't help me identify investment opportunities.
Updates on a few positions
In the May 29 newsletter I mentioned adding Twitter ("TWTR") and Tesla ("TSLA"). Since then, TWTR has gained roughly 33% and TSLA has gained about 165%.
TWTR reported strong user growth and has also stated publicly that they are studying ways to alter their business model. I think this is a work-in-progress and I am happy to continue buying shares even at today's levels.
The bull case for TSLA remains that a) the world is going electric where TSLA's lead is ginormous, and possibly insurmountable and b) TSLA cars are effectively computers on wheels. I have no idea what the share price will be in the next day/week/month, but I expect to continue to own shares and would likely buy more if there is a material (10% or so) selloff.
I haven't mentioned Nintendo ("NTDOY"), but it has been a moderate holding in most portfolios for most of this year, and shares have gained about 35% year-to-date. NTDOY has one of the top selling games in Animal Crossing, and it's new Switch console has been selling like wildfire. The uber-bullish scenario is that Switch becomes an ecosystem (or platform), which would trigger a re-rating upwards, but even without that NTDOY has successfully grown digital sales, now 56% of sales, (March 2020) from 38% in March 2019. Gaming has been a big winner during the pandemic, and most accounts own Activision ("ATVI") as well.
NTDOY's management is very conservative, and the company has $11.8bn cash and no debt. Even with this year's gains, NTDOY trades at a reasonable multiple, and doesn't seem to be on many investors' radar yet. I will be looking to add more NTDOY.
Online payments and digital banking is one area that has lots of running room, and up to this point the only name I've owned is PayPal (which I wrote about in the November, 2019 newsletter). I think the space is still evolving and I've added Square ("SQ") also. SQ has continually introduced new products aimed at both samll/mid sized businesses and also consumers, many of which are gaining traction. SQ was actively involved in distributing PPP loans (60% of recipients were new to SQ) and also recently purchased Spanish peer-to-peer payments app Verse, in what may be a bid to take it's lending platform global.
And on my radar
Fastly ("FSLY") has been on a tear, with revenue growth accelerating to 62% in Q2 from 38% growth in Q1. FSLY is a beneficiary of the aforementioned migration to an online world by providing "content delivery networks", essentially "traffic cops" for the internet. The best known CDN provider is Akamai, a company which is in several Peattie Capital portfolios. I'm also looking at 2U, Inc. ("TWOU") as a potential leader in disrupting higher education.
Stay tuned, these are both new for me, and I think each merits a closer look.
Please feel free to reach out with any questions comments and in the meantime stay safe and healthy!
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