PCM Newsletter
Our quarterly newsletter provides market commentary, portfolio updates, and insights into our investment thinking. Browse the archives below.
December 2015
+| Range of Returns |
November |
YTD |
|---|---|---|
| All PCM Accounts |
(2.0%) - 0.4% |
(5.1) - 3.5% |
| S&P 500 |
0.1% |
1.0% |
Slightly down for most Peattie Capital portfolios
Peattie Capital has had an abundance of exceptionally strong performers this year, such as EPAM Systems ("EPAM") which has gained 65%, Sabre Corporation ("SABR") which has gained 45% and Royal Caribbean ("RCL") which has gained 13%. EPAM has never been a Peattie Capital recommended stock, but the other two have been and subsequently have been big winners.
Despite this, most Peattie Capital portfolios are down slightly in 2015, as one (or two) big positions has faltered badly and dragged down overall performance. For example, KVH Industries ("KVHI"), which is both a micro-cap and has significant overseas operations, started the year ~$12, peaked in the spring near $16, and closed November at $9.86. This 38% drop has had a major impact on performance, but at today's price I consider KVHI an outstanding opportunity, with the best risk/reward profile of all Peattie Capital positions. I am nibbling at more shares even though for some accounts KVHI represents over 10% of the portfolio.
Two other large positions that have corrected and caused performance to suffer are Sealed Air ("SEE") and Macquiarie Infrastructure Trust ("MIC"), which have dropped 18% and 14% respectively from nearby highs. There are big unrealized gains in these two names and I'm not inclined to sell them at today's prices. Based on what I know today, I believe each is a good mid-long term opportunity.
Narrow market continues
The 2015 "bigger is better" theme continued in November. According to a recent Forbes article ("How a monster year for Amazon, Google and Facebook is carrying the stock market" - November 16), the return for the S&P 500 would be -2.2% absent those three names (as well as Microsoft and General Electric). Even with them, the return of the S&P 500 is 1%, excluding dividend reinvestment.
As John Authers said in this weekend's Financial Times ("Bear your Fangs or use Nifty footwork to shine in the US"), "to win you needed to fix on a few large stocks that looked overvalued and hold onto them....an almost impossible strategy to justify."
This "chase a few hot stocks" market has not been kind to many well known (and highly successful) investors: Warren Buffett's Berkshire Hathaway is down about 10%, Bill Ackman's Pershing Square is down about 17%, David Einhorn's Greenlight Reinsurance is down around 33%, and Joel Greenblatt's Gotham Neutral Fund is down around 8%. In addition, the Valueline Arithmetic Index is down 6% in the past six months. (Source: Hays Advisory November 12, 2015)
US economy still good
The somewhat disappointing initial read on Q3 GDP was revised upwards in the second report, and other data points have been mixed. Once again consumer spending has been solid, with houses and autos showing strength. I continue to believe that the Fed is likely to raise the targeted Fed Funds rate in December, and reiterate that I don't see that as a catalyst for a market correction provided there are no hawkish comments with regards to the pace and degree of future rate hikes. Eventually there will be talk of a subsequent hike, but historically the market handles the initial stages of a tightening cycle very well.
My overall takeaway is that despite the headwinds of a (once again) surging dollar and weak energy prices, the US economy continues its slow but steady expansion. Absent a change in that trend, I don't expect a material downdraft in equity prices, broadly speaking. That said, finding cheap stocks has become more difficult as absolute valuations of stocks are somewhat expensive, and bonds are very expensive. Several equity market and asset allocating strategists I follow are warning that returns from today's levels are likely to be subpar for the next few years.
My strategy won't change, and I won't chase the mega-caps stocks that have dominated this year. I will favor larger stocks and also focus on stocks that have sizeable domestic operations, that have pricing power, that have a nearby catalyst, and that may be tax-loss sales candidates as 2015 closes. For a number of Peattie Capital clients attractive and rising dividends is a must.
Outlook for 2016
2016 is an election year, and according to Ladbrokes, Hillary is the 4-5 favorite (Source: Barron's November 30). By itself this is neither good nor bad as markets can perform well regardless of which party occupies the White House. More important will be the makeup of Congress, and a close Presidential race might contribute to uncertainty which could limit the market's progress until the outcome is clear.
It looks like 2015 will end with a small gain and in the 10 times the market has closed between -3% and +3% since 1945, the following year the market was up an average of 12.8% and was higher 80% of the time. There was only one year when it was flat for a second year, 1948, when it fell 0.7% (Source: Barron's November 25, 2015).
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.
In other words, for long term investors, I (mostly) 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 2015 Peattie Capital recommended stocks, using closing prices from
November 30.
This chart shows all PCM's recommendations for the past 11 months
showing an average return of 6.4%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
There is no recommended stock for this newsletter 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.
and short sale candidates which are only appropriate for clients who have requested
them.
10/2/15
ViaSat
VSAT
Buy
$65.50
$61.98
-5.4%
9/2/15
Google
GOOG
Buy
$590
$742.60
25.9%
8/4/15
DexCom, Inc
DXCM
Buy
$85
$85.02
0.0%
7/2/15
Cogent Communications
CCOI
Buy
$32.50
$33.56
4.3%
6/2/15
Express Scripts
ESRX
Buy
$86.00
$85.48
-0.6%
5/4/15
Align Technology
ALGN
Buy
$59.00
$66.74
13.1%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$29.26
36.7%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$33.56
-10.2%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$10.42
-6.3%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
November 2015
+| Range of Returns |
October |
YTD |
|---|---|---|
| All PCM Accounts |
1.7% - 6.6% |
(3.6%) - 4.2% |
| S&P 500 |
8.3% |
1.0% |
Big bounce in October, but it's a very narrow market
The S&P 500's 8.3% return in October was the best monthly performance since October, 2011 and several US indices are now back in positive territory for the year. Large companies are performing much better than small-caps as the S&P 500 has bounced 13% from its August 25 lows while the Russell 2000 (small-cap) index is only +5% since then. For the year, the Russell small-cap index is still negative, having returned -3.6%. In other words, it has been a year to "go big or go home."
For the month, most Peattie Capital portfolios gained between 4%-6% and for the year most are about flat. Peattie Capital recommended stocks have an average return of +4.8% year-to-date (see table below). According to Hays Research (Morning Comments October 29), on an equal- weighted basis (not cap-weighted) the S&P 500 is -2.7% for the year through October 27 and the median U.S. stock return is -8.4%. 2015 has been an exceptionally difficult year to make real money in equities.
My best guess would be that this will continue to be the case in the near-intermediate future and I believe that good stock picking will be increasingly critical to overall performance. Right now it is a highly selective and idiosyncratic market.
US economy still good
Consumer spending remains fairly strong as does residential spending. While the most recent GDP report had a mildly disappointing headline of only +1.5% (annualized) growth, a significant factor in that was the biggest inventory decline of the past three years. According to David Rosenberg at Gluskin, Sheff ("Breakfast with Dave" October 30, 2015) excluding inventories and net exports (which were practically flat) the "real final domestic demand expanded at a decent 2.9% annual rate in Q3." Rosenberg's conclusion, and I agree, is that there is just no imminent danger of a U.S. recession.
Overall my thinking is that there has been so much talk about the timing and pace of a rate hike that it's hard to believe that when it happens it will have a meaningful impact unless it's accompanied by language altering the market's current expectations for the pace of future rises. The rest of the world (mostly) is still in easing mode, and so I would expect continued upward pressure on the U.S. dollar. Once again, companies with significant overseas sales have noted the negative impact that the U.S. dollar has had on earnings, and for the time being I expect that trend to continue.
Earnings, earnings, earnings
More important are earnings, and companies that miss expectations and/or provide disappointing guidance are being severely punished. A couple of smaller Peattie Capital holdings have missed, and the subsequent 10%-15% drop in the share price has caused the recent relative underperformance of Peattie Capital portfolios. Akamai ("AKAM") and NXP Semiconductors ("NXPI") are two such examples.
Several larger Peattie Capital positions report earnings this week, and I am optimistic that they will deliver solid earnings growth and guidance. I mentioned last month that I think the current environment favors larger companies, which is still true. In addition I like companies that have pricing power and that operate predominantly in the United States, such as companies involved in the U.S. housing market and retailers, for example.
Starting to get mildly curious about select international markets
Emerging markets have had a difficult year and some of them have increasingly appealing investment characteristics. For example, China, despite the headlines about slowing growth and yuan devaluation, has a growing middle class with 10% wage growth and a declining savings rate (Source: Rosenberg October 28, 2015). Nike ("NKE") just announced they grew revenues 30% in their China segment and said demand would grow at "a pretty significant pace." Apple ("AAPL") reported 99% growth in Chinese revenues (to $12 billion) which represents 25% of their sales and Coach (COH) reported thay had "double digit" growth in mainland China. Each of these is an interesting data point for the companies and for China, and as a way to play the strength of the emerging Chinese middle class I have been nibbling at Baidu ("BIDU") which is growing revenues very fast but also spending heavily to support new services.
Another market that intrigues me is Japan where the shrinking population presented a significant headwind to investment success. However over a recent twelve-month period the number of children in Tokyo under 15 grew by 14,000 (Source: Barrons "The Rewards of Reading" October 12, 2015). Additionally, Prime Minister Abe has taken steps to grow the economy, such as instituting quantitative easing, and promising to cut corporate taxes. The return on equity at Japanese companies is currently 8%, well below the US benchmark of 15%, suggesting that there is plenty of earnings power if corporations focus on improving that metric (Source: IBID). I think owning the Japan ETF (ticker "EWJ") is a reasonable risk/reward at today's levels, especially for long-term, buy and hold accounts.
November marks the beginning of the "best six months of the year" and broadly speaking the majority of hedge funds are well behind relevant indices, and so I would expect an underlying bid to support equity prices through year end. As I've said many times, however, the real goal for Peattie Capital is to buy the right companies at the right prices and hold them as long as they are still good companies.
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.
In other words, for long term investors, I 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 right now.
Here is an updated version of 2015 Peattie Capital recommended stocks, using closing prices from
October 30.
This chart shows all PCM's recommendations for the past 10 months
showing an average return of 4.8%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: ViaSat ("VSAT") ViaSat("VSAT") is the leading participant in the race to enable internet access on airplanes, and is scheduled to launch its
second satellite late 2016/early 2017. Shares have been treading water this year, but VSAT continues to win new contracts and roll out coverage. Jet Blue,
United, and Virgin America all use VSAT's technology. Want to binge watch "Orange is the new Black" on your next Virgin America flight? VSAT technology
allows that to happen. VSAT shares appear to be marking time until the second satellite launches, but in the meantime growth of the underlying business
remains solid. I think it's
time to buy the shares now if you believe in the company, as I do. VSAT shares held steady even when Elon Musk's SpaceX experienced its first failed
satellite launch earlier this year (VSAT's satellite is scheduled to be launched by SpaceX also) which suggests to me the market will be patient with this
name. On traditional metrics VSAT is an expensive name, but margins expanded nicely in Q1 of fiscal 2016 and last fiscal year cash from operations grew from $200mm
to $350mm. I will be buying VSAT shares on any weakness and recommend buying them up to $65.50. Please don't hesitate to contact me with questions or comments and let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
9/2/15
Google
GOOG
Buy
$590
$710.81
20.5%
8/4/15
DexCom, Inc
DXCM
Buy
$85
$83.32
-2.0%
7/2/15
Cogent Communications
CCOI
Buy
$32.50
$30.72
-4.4%
6/2/15
Express Scripts
ESRX
Buy
$86.00
$86.38
0.4%
5/4/15
Align Technology
ALGN
Buy
$59.00
$65.46
10.9%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$29.32
37.0%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$30.72
-17.6%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$10.41
-6.4%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
October 2015
+| Range of Returns |
September |
YTD |
|---|---|---|
| All PCM Accounts |
(4.1%) - (1.6%) |
(7.4%) - 0.9% |
| S&P 500 |
(2.7%) |
(6.8%) |
Volatility continues
September was another brutal month in equities, and the third quarter was the the worst quarter of the past four years with the S&P 500 dropping 7%. Every major index is now negative for the year, as are most sectors. Most Peattie Capital portfolios are now down mid single digits.
Within equities there was nowhere to hide as correlations all moved towards one. Some equity classes have performed a bit better than others this year, but being well diversified across different style boxes has really not helped very much. I continue to believe that the alleged benefits of diversification are both misunderstood and limited as the times when investors need those benefits the most, they are at their least effective.
Quick history lesson
While August reminded me of August, 2011, September reminded me of the summer of 1998 when the markets also experienced extraordinary volatility. Back then the issues were the collapse of Long-Term Capital Management and an Asian crisis which caused the S&P 500 to drop 8% and be down 1% for the year at the end of August. From there the markets rallied strongly and closed the year with a total return of nearly 30%, all of which came in the final four months. Sometimes raising a little cash and doing nothing is the right answer, as hard as that may be.
To be sure, there are differences between then and now, and to my way of thinking the most important one is that the Federal Reserve no longer has the conventional rate-cutting tool in its toolbox. However, historically the domestic U.S. economy has been reasonably protected from international economic issues, and my sense is that this time will be no different.
Today's concerns revolve around global economic conditions (particularly China and its implications), the collapse of oil and other commodities, technical breakdowns in a number of indices, valuation in certain sectors, an abundance of debt, the timing and path of potential rate hikes and the ensuing shape of the yield curve, the inflation/deflation debate, and upcoming elections. None of these represent systemic risk to the financial system like 2007-2009, nor are there wildly outlandish valuations like the tech bubble of 2000-2003.
So far the U.S. economy has maintained a slow but steady expansion. However this morning's unemployment report was surprisingly weak, and it remains to be seen whether it will negatively impact areas that have been doing well such as housing and consumer sentiment and spending. Regardless, broadly speaking, today's market is still somewhat expensive on traditional metrics, and my guess would be that the correction isn't over yet.
I think the chances are good that we retest the August low, which would create better valuations and also bring more fear overall. Earnings season is about to start and I am optimistic that good stock picking will lead to better performance.
More defensive in portfolio construction
For the first time in several years I have added a few shorts to select portfolios. As for longs, generally speaking I continue to like technology and also favor larger companies over smaller ones. That said, the real goal is to find good companies and pay the right prices to own them. The U.S. dollar's strength continues to wreak havoc on any companies with significant international operations, although the pace of the dollar's rise has slowed.
Last week Google hit $590 and so I have begun buying it and added it to the list of recommendations. On Sept. 18, Sealed Air reiterated 2015 earnings guidance of $2.24-$2.28 despite significant currency headwinds and yet the shares are down 15% since early August. I still like the cruise lines industry which continues to perform very well. A number of analysts are warming up to energy companies, and I noticed a summary of Morgan Stanley's energy analyst stating (Oct. 1) that he sees an upside oil shock as almost inevitable, based on spare capacity production at historic lows concurrent with resilient global oil demand. Shares of the super majors seem to have stabilized, at least for now (Exxon e.g.).
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.
In other words, for long term investors, I 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 right now.
Here is an updated version of 2015 Peattie Capital recommended stocks, using closing prices from
September 30, 2015.
This chart shows all PCM's recommendations for the past nine months
showing an average return of -4.1%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: There is no recommended stock for this newsletter Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
9/2/15
Google
GOOG
Buy
$590
$608.42
3.1%
8/4/15
DexCom, Inc
DXCM
Buy
$85
$85.86
1.0%
7/2/15
Cogent Communications
CCOI
Buy
$32.50
$27.16
-15.4%
6/2/15
Express Scripts
ESRX
Buy
$86.00
$80.96
-5.9%
5/4/15
Align Technology
ALGN
Buy
$59.00
$56.76
-3.8%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$27.18
27.1%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$27.16
-26.8%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$9.75
-12.1%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
September 2015
+| Range of Returns |
August |
YTD |
|---|---|---|
| All PCM Accounts |
(6.4%) - (4.5%) |
(4.3%) - 2.5% |
| S&P 500 |
(6.3%) |
(4.2%) |
Volatility is back...with a vengeance
August was a brutal month in equities. As is typical in sudden downturns, there was nowhere to hide as correlations all moved towards one. In other words, everything went down together. Most indices were down as of the end of August, and after yesterday's selling they are all down. Most Peattie Capital portfolios are now down low single digits for the year, however a few have held on to slight gains.
This August reminded me of August, 2011 when the markets also experienced extraordinary volatility. In the six trading days from Thursday the 4th (2011) through Thursday the 11th, the Dow closed up or down more than 400 points (4%) five times. Likewise the S&P 500 closed up or down over 50 points (3.9%) five times, and overall the S&P 500 shed 5.5% in that stretch.
My point is that volatility is a necessary and healthy part of long-term investing and by itself isn't a reason to change strategy. That said, it's always scary, and feels like the world is going to end. Retail investors pulled $19bn out of equity mutual funds last Tuesday (Source: Bill Herman "Navigating Through Volatility" 8/3/15) after the Dow's 1,000 point drop early Monday.
U.S. Economy continues to improve
The recent GDP report was solid, with Q2 growth revised up to +3.7%. The report was strong across the board, with particular strength in housing, followed by capex shipments, hours worked, industrial production and consumer spending. As far as the U.S. goes, the economy continues to expand steadily. Corporate earnings, even with a 56% decline in energy profits, rose 1.4% in Q2 (Source: Thomson Reuters)
I don't see a bubble (like tech in 2000) or systemic risk (the financial companies in 2008). My opinion remains that we are in a much needed and ultimately healthy correction which is coming during a traditionally slow period typically characterised by lighter volumes and an absence of corporate news such as earnings or conferences. My guess would be that the market will retest recent lows (down about 6% from month-end prices) and could even take them out. However there's no way of pinpointing the timing of that, and until the Fed is out of the way, I think markets will remain choppy and volatile.
Let's keep it in perspective
David Rosenberg of Gluskin Sheff made a few important points in his morning comments today:
- So far this is an orderly correction with no panic in bond yields or the U.S. dollar
- Bear markets need recessions and all signs suggest the U.S. expansion is in mid cycle
- The typical correction is 14% from the nearby high about 4% below today's start
- Corrections typically take place every 18 months, and we've gone 70 months without one this time-the third longest time period on record without a correction
- Housing activity is at eight-year highs, auto sales at 10-year highs, jobless claims at 25-year lows and capex orders are swinging up-what else do you really need to know?
- We just saw an 11.3% surge in mortgage applications in the week ended August 28-the seventh increase in a row
- The refinancing index jumped 16.8% and this is cash flow in consumer pocketbooks (along with extended gas price relief)
- The real estate market is drum tight, affordability at great levels, household formation running below housing starts, and banks are making closed-end loans again
- Some of the steepest corrections historically actually happened when the macro picture was the strongest, believe it or not-which is why they don't morph into bear markets
- The Fed is either "one and done" or "two and through"- either way, no bull market ever ended after the first rate hike
Action plan for client portfolios varies depending on client's profile
For more risk-averse clients I have been liquidating select positions and holding cash. For more long-term oriented clients and for those whose account here is only a small piece of their investing pie I am holding on to positions and nibbling at my highest conviction names. There are some attractively priced equities available right now, which is not to say they can't decline further. The NASDAQ declined over 80% when the tech bubble burst and in some cases shares traded below the value of the cash on their balance sheets.
Among the names I have been adding to are Wells Fargo, Google, and Sealed Air. I still do not like oil and the energy complex and don't own any names in the industry. However portfolios own a couple names that have energy companies as clients and so there is some indirect exposure to the space.
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.
In other words, for long term investors, I 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 right now.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
August 31.
This chart shows all PCM's recommendations for the past 50 months
showing an average return of +37.4%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Google ("GOOG") Google is expected to grow earnings mid teens for the next several years, and with a new CFO (Ruth Porat) from Morgan Stanley, will
no doubt be more "user friendly". One of GOOG's first strategic moves since she joined was to announce the separation of the day to day
operations of the company from the long-term (very long term) projects. I think investors will welcome the transparency and the ability to quantify core
operations like search and YouTube. In this environment I like size and deep pockets, which is not to say that GOOG won't correct with the market. The faster and
farther the drop the higher the correlation between stocks and GOOG won't be immune from that. I am recommending buying the shares but only up to $590 and
won't add GOOG to the list unless it trades at that level. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
8/4/15
DexCom, Inc
DXCM
Buy
$85
$94.15
10.8%
7/2/15
Cogent Communications
CCOI
Buy
$32.50
$27.79
-14.5%
6/2/15
Express Scripts
ESRX
Buy
$86.00
$83.60
-2.8%
5/4/15
Align Technology
ALGN
Buy
$59.00
$56.66
-4.0%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$27.23
26.9%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$27.79
-26.1%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$9.52
-15.3%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$12.03
-11.5%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$51.45
58.9%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$11.05
-12.6%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$86.34
15.6%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$17.00
30.0%
1/8/14
ChipMOS**
IMOS
Buy
$19.00
$21.84
15.7%
12/5/13
Sealed Air
SEE
Buy
$31.50
$51.45
66.2%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$14.60
-17.3%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$88.16
110.8%
10/2/13
JP Morgan
JPM
Buy
$52.00
$64.10
29.4%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$55.18
39.9%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$78.72
63.5%
4/2/13
ChipMOS**
IMOS
Buy
$12.90
$21.84
71.5%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$49.14
15.6%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.**
WFT
Buy
$13.25
$12.27
-7.4%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$11.05
-12.3%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$51.38
87.8%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS**
IMOS
Buy
$11.50
$21.84
93.6%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$11.05
20.8%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$118.15
135.1%
3/6/12
du Pont**
DD
Buy
$50.50
$63.95
37.4%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$78.72
227.5%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$11.05
46.7%
10/3/11
Apple
AAPL
Buy
$50.00
$112.76
138.0%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$11.05
17.8%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$11.05
-1.3%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
August 2015
+| Range of Returns |
July |
YTD |
|---|---|---|
| All PCM Accounts |
1.0% - 3.1% |
0.2% - 7.9% |
| S&P 500 |
1.9% |
2.2% |
Range-bound market as data remain mixed
The S&P 500 gained nearly 2% in July and has gained about 2% for the year as economic data remain mixed and energy has weighed on earnings. Most Peattie Capital portfolios were in line with the markets in July, and for the year the best performers are those that are specifically geared towards growth. Income and conservative accounts are the laggards.
I had been expecting a bit bigger recovery in GDP, so the +2.3% reading for Q2 was mildly disappointing. Auto sales remain strong, probably because of an improving labor market and the low price of gas. One benefit of the drop in oil prices is the boost it gives to consumers, and consumer spending represents something on the order of 68% of GDP.
However confidence numbers were weak, and wage growth is virtually nil. If Janet Yellen is "data dependent" she continues to have ammunition on both sides of the equation to raise (or not) the targeted Fed Funds rate. My own opinion is that I'd like to see a step before year end, but I don't expect a series of hikes.
Regardless, in this trendless and choppy market, I think good stock picking will be an advantage and to emphasize that I will discuss more stocks than usual in this monthly newsletter. Additionally, I have been considering several short positions, and for portfolios where appropriate I expect to have some short exposure before too long.
Strong earnings from several of Peattie Capital's largest positions
Between July 30 and August 4, four of Peattie Capital's five largest positions reported earnings. Three delivered outstanding results which drove sizeable jumps in the shares. The fourth was mildly disappointing, but the longer term picture is very much intact. In chronological order:
Sealed Air ("SEE") reported another terrific quarter with surprisingly strong margins. Management noted on the conference call that they still had pricing power in every division (though not as much as previously) and hinted at another stock buyback program. SEE has been a huge performer for Peattie Capital, having returned 65% since I recommended it last August and 71% since I recommended it in December 2013.
Royal Caribbean ("RCL") gained 14% in July, most of which came on the 31st after RCL reported $0.84 per share earnings for the quarter, against expectations of $0.70. As I said last month, I believe RCL is well on its way of achieving its stated goal of doubling earnings by 2017. Shares of RCL have returned 115% since I recommended them in November, 2013.
Both SEE and RCL have significant non U.S. operations, and the strong U.S. dollar has been a material challenge for them. So far, each has managed that headwind very well. Given the comparatively stronger U.S. economy, and the potential rate hike by the Federal Reserve, I would expect dollar strength to continue. Nonetheless, I am inclined to buy more shares of each and expect to do so based on what I know today if an attractive opportunity to do so presents itself.
Macquarie Infrastructure ("MIC") reported earnings on August 4 and raised its quarterly payout for the 7th consecutive quarter. The new quarterly payout of $1.11 remains below the company's targeted ratio of 80%-85%. In addition, MIC reiterated that it expects mid-teens growth for each of the next two years, and doesn't expect to pay federal income taxes until 2018 at the earliest. MIC has returned 246% since I originally recommended it in November, 2011, and 73% since I recommended it again in June, 2013.
KVH Industries ("KVHI") reported in line revenues and earnings but took down revenue guidance for the year based on the current soft environment for offshore oil and gas drilling. This segment represents roughly 20%-22% of the company's VSAT revenues. Still KVHI delivered 10% revenue growth and expects GAAP earnings of $0.20-$0.30 for the year (NON-GAAP $0.75-$0.85). KVHI remains a work-in-progress, but I believe it will eventually be a very rewarding position.
Other terrific earnings for Peattie Capital recommended stocks so far have come from Ingredion ("INGR") which jumped 10% after reporting earnings on July 30 and Sabre Holdings ("SABR") which also reported August 4 and shares are up roughly 6% so far. Including today, SABR has gained 30% since I recommended it in March, 2015 at $21.60.
On the downside, Make My Trip ("MMYT") reported a loss, and shares tumbled to ~$15. In addition, the drop in oil prices led to a selloff in energy-related names, and I have sold all client shares of Weatherford ("WFT"). For the time being I am staying away from all direct oil plays (a couple positions have indirect exposure) and am also reviewing MMYT, which has consistently disappointed. These two names are very small positions for those clients who own them, and portfolios have not been materially affected by their underperformance.
Stock picking continues to shine
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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
July 31.
This chart shows all PCM's recommendations for the past 49 months
showing an average return of +41.3%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended Stock: DexCom ("DXCM") DexCom ("DXCM") has developed a continuous glucose monitor (CGM) technology which is used by diabetics to monitor blood sugar levels.
With the market only 10% penetrated (Source: Coburn Ventures), DXCM is very well positioned for future growth and could easily be taken out by any number
of health care companies (although as a rule I don't buy shares for that reason exclusively). Johnson & Johnson's Animas Vibe insulin pump posted double digit growth this quarter and "features the ability to display DXCM's G4 CGM data" according
recent research from Wedbush Securities. Another feature of the latest version (expected launch in Q4) is the ability for a mother to monitor to her child's glucose levels on her
iphone, regardless of where the child is. DXCM is an expensive stock but in keeping with the current (slow/no growth) environment will be attractive to any number of
investors provided it maintains reasonable (mid teens) growth, which I think is highly likely. In addition, it is probably underowned. I expect it could be
quite volatile, and so for now it is just a small holding in growth-oriented portfolios at Peattie Capital.
For those inclined, I recommend buying shares up to $85. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
7/2/15
Cogent Communications
ALGN
Buy
$32.50
$31.79
-2.2%
6/2/15
Express Scripts
ESRX
Buy
$86.00
$90.07
4.7%
5/4/15
Align Technology
ALGN
Buy
$59.00
$62.70
6.3%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$26.60
24.0%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$31.79
-15.7%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$10.02
-11.0%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$12.36
-9.1%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$53.17
64.2%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$12.27
-3.0%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$88.29
18.2%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$15.38
16.9%
1/8/14
ChipMOS**
IMOS
Buy
$19.00
$21.84
15.7%
12/5/13
Sealed Air
SEE
Buy
$31.50
$53.17
71.7%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$14.60
-17.3%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$89.85
114.7%
10/2/13
JP Morgan
JPM
Buy
$52.00
$68.53
37.9%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$53.65
36.4%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$84.93
73.0%
4/2/13
ChipMOS**
IMOS
Buy
$12.90
$21.84
71.5%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$51.20
17.6%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.**
WFT
Buy
$13.25
$12.27
-7.4%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$12.27
-2.6%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$50.60
83.4%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS**
IMOS
Buy
$11.50
$21.84
93.6%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$12.27
34.1%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$120.72
140.2%
3/6/12
du Pont**
DD
Buy
$50.50
$63.95
37.4%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$84.93
245.9%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$12.27
62.9%
10/3/11
Apple
AAPL
Buy
$50.00
$121.30
154.0%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$12.27
30.8%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$12.27
9.7%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
July 2015
+| Range of Returns |
June |
YTD |
|---|---|---|
| All PCM Accounts |
(2.9%) - (0.7%) |
(1.8%) - 5.6% |
| S&P 500 |
(2.1%) |
0.2% |
Volatility in June as several markets decline sharply
In June, the S&P 500 returned -2.1%, its worst month since January, 2014. For the year it is now +0.2% (excluding dividend reinvestment). Several other markets around the world also experienced difficulties in June, such as the FTSE 100 which was down 6.6% and the Shanghai stock market has dropped nearly 25% from its recent high.
In the US, last year's best performing asset class was REITs and this year they are down 6%. US Treasury bonds have also performed poorly, with the return of the 10-year note down approximately 6% and the 20-year down over 7% for the year. While I don't believe US bonds are in a bubble (how can something that will return 100% of the principle be in a bubble?) I do believe they are misunderstood by many investors who believe them to be safe (in the sense that they can't lose value).
Predicting interest rates is beyond my abilities, but I expect a small move from Janet Yellen before year end. From a bigger picture perspective, many parts of the world are awash in debt, which risks having the unintended consequence of limiting growth, as debt service soaks up funds that would otherwise be used for expansion, consumption, investments and so forth. Broadly speaking I think the world is oversupplied, which is deflationary and will keep something of a lid on longer term interest rates.
A quick recap of Peattie Capital's six largest holdings (in order)
Macquarie Infrastructure Trust ("MIC"): MIC continues to grow operations and free cash, and has stated repeatedly its intention to payout 80%+ of its cash from operations. MIC has already raised its dividend twice this year and I expect increases to continue. Units have returned 19% in 2015 and still yield over 5%.
Sealed Air ("SEE"): SEE continues to execute its turnaround, and has repeatedly bested its own forecasts for free cash growth. At its June 18 Analyst day, SEE outlined its long term growth plans and the strategies to achieve them. Carole Lowe, CFO, stated "we are ahead of plan and well-positioned to do even better." SEE has outstanding management, which is still finding ways to manage expenses and expand margins. For example, SEE recently replaced US debt with lower coupon Eurobonds, which has the twofold benefit of reducing interest expense and providing a natural hedge to overseas operations. Shares have returned 22% in 2015.
KVH Industries ("KVHI"): KVHI is a work-in-progress. Over the past couple years it has completed building its global network, and added middleware and content to provide an "end-to-end" solution for marine satellite customers. In June, KVHI announced a joint distribution agreement with Inmarsat, which should benefit both companies greatly. With twice the market share of its nearest competitor, I think KVHI is well positioned to take share in the growing marine satellite communications industry. Other parts of the business have been lumpy, but appear to be headed into an upswing. Shares have returned 6% in 2015.
Wells Fargo ("WFC"): One of the intentions of the Dodd Frank legislation was to end the era of banks that were "too big to fail". Alas, the remaining banks in the US are bigger than ever, with the four largest controlling the majority of the country's deposits. WFC is my favorite of the group and it is also Warren Buffett's as some 20% of his equity holdings are WFC shares. For the year, WFC has returned 3%.
Royal Caribbean ("RCL"): RCL's stated goal is to double earnings by 2017 to roughly $7 per share (from $3.39 in 2014). With China opening up I think the chances are good that RCL will achieve its goal, although the shares will likely respond to other issues short term such as the price of oil. RCL is down ~4% year-to-date.
DirecTV ("DTV"): It looks like AT&T's ("T") purchase of DTV will go through very soon, which presents the question of whether to hold T shares or sell them. My current thinking is to hold them for income-oriented acounts as the yield is 5%, and looks safe based on what I know today. For more growth-oriented accounts I will likely sell T. DTV has returned 7% through June 30.
Global issues masking improving US economy
At the risk of repeating myself (again) I maintain that the US economy is doing better than is widely believed. Auto sales are strong, home sales are the highest in seven years, and jobless claims the lowest in 15 years. Bank and homebuilder stocks are breaking out and I believe we will see GDP growth above 3% in the second quarter. As far as I'm concerned, there is no recession in sight.
As to global issues, Greece's economy contributes 2% to the Eurozone economy (Source: Gary Antonacci Dow Theory Letter July 1, 2015) and their debt is believed to be held mostly by sovereigns and the odd hedge fund taking a plunge. Unlike the financial crisis, in which all the major banks were exposed to each other, I don't see any contagion here. Simply put, I just don't see Greece being a cataclysmic event, as intractable as the situation is.
To be sure there are trouble spots around the globe which is why now is a particularly good time to focus on US stocks rather than rely on a broad-based asset allocation program. My position is that overall US stocks are modestly expensive, but are still supported by a number of factors: inordinate liquidity and highly accomodative monetary conditions, an active merger calendar, scepticism by the public, and reasonable valuations based on today's levels of interest rates. One old rule of thumb is the "Rule of 20" which states that the market's multiple should be 20 less the inflation rate, which would argue for 18x, slightly above today's level.
It has been a long time since the last meaningful correction in US stocks, and many people are calling for one. However I think that US stocks are attractive to many global investors, and my guess would be that a significant selloff in US indexes is unlikely.
Stock picking continues to shine
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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
June 30.
This chart shows all PCM's recommendations for the past 48 months
showing an average return of +42.3%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Cogent Communications ("CCOI") I mentioned last month that Cogent Communications ("CCOI") hadn't performed well despite the favorable "net neutrality"
ruling from the FCC as shares fell from the high $30's to the low $30s. Recently they have rebounded back to $34. In June, Dave Schaeffer, CEO, presented at a couple conferences and reiterated CCOI's low-cost model and opportunity for growth.
He stated that the company would return to 10%-20% revenue growth and continue to expand margins 2% annually for the next several years. Given the pricing
advantage they provide, I think the chances are good they will succeed. Schaeffer also stated that the company has too much cash on its balance
sheet and would be looking for ways to return additional cash to shareholders, even though the shares already yield 3.8%. In his June 12 presentation at the Barclay's High Yield Conference Schaeffer said
"about an hour ago, the US District Court denied the stay that was going to invalidate the open Internet order and the FCC's assertion of Title II
regulation." In other words, legal challenges to the FCC's decision aren't working, at least for now. CCOI shares dropped 12% in 2014 and are flat this year, probably because of the net neutrality issue and a slowdown in revenue
growth. I believe those issues are temporary, as Schaeffer has hired a new head of sales and expanded the sales force. In addition, his compensation
is tied to a return to 15% revenue growth and 20% EBITDA growth. Given the company's strong fundamentals, predictable growth and ongoing buyback program
(3% of the company annually) I think the risk/reward here is compelling and I recommend buying shares up to $32.50. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
6/2/15
Express Scripts
ESRX
Buy
$86.00
$88.94
3.4%
5/4/15
Align Technology
ALGN
Buy
$59.00
$62.71
6.3%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$23.80
11.0%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$33.84
-10.3%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$9.72
-13.6%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$11.42
-15.8%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$51.38
58.7%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$13.45
6.3%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$79.81
6.5%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$15.81
19.9%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$21.84
15.7%
12/5/13
Sealed Air
SEE
Buy
$31.50
$51.38
66.0%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$19.68
11.5%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$78.69
88.6%
10/2/13
JP Morgan
JPM
Buy
$52.00
$67.76
35.6%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$54.49
38.3%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$82.63
68.7%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$21.84
71.5%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$52.20
19.6%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$12.27
-7.4%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$13.45
6.7%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$47.50
73.1%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$21.84
93.6%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$13.45
47.0%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$114.97
128.8%
3/6/12
du Pont
DD
Buy
$50.50
$63.95
37.4%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$82.63
237.6%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$13.45
78.6%
10/3/11
Apple
AAPL
Buy
$50.00
$125.42
162.3%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$13.45
43.4%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$13.45
20.2%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
June 2015
+| Range of Returns |
May |
YTD |
|---|---|---|
| All PCM Accounts |
0.3% - 3.1% |
0.3% - 6.4% |
| S&P 500 |
1.1% |
2.3% |
Nice bounceback in May for several core positions
In May, a number of Peattie Capital positions performed very well. Royal Caribbean Cruises ("RCL") bounced 12% and has gained 82% since I recommended it in November, 2013. Sealed Air ("SEE") gained 7% and has returned 50% since I recommended it 10 months ago. Peattie Capital's largest position is Macquarie Infrastructure Trust ("MIC") which returned over 3% in May and has more than tripled since I recommended it in November, 2011. Cedar Fair ("FUN") closed above $60 Friday, an all-time high, and yields over 5% as well.
On the downside, recent recommendation Cogent Communications ("CCOI") has fared poorly despite the favorable decision regarding "net neutrality". I am reviewing CCOI as names that do not perform well despite good news is a red flag for me. Another large holding, KVH Industries ("KVHI"), continues to tread water and I remain very excited about it's prospects. For several accounts I am adding more shares.
KVHI has been a particularly volatile name, as it is a micro cap ($200MM) and has had several 35% corrections the past few years. This volatility is stressful in the short term, but I believe the company will be highly successful and patience will be rewarded.
Mixed signals about the economy, but directionally going the right way
GDP numbers are still soft, but April's leading indicators report was +0.7%, the biggest advance in nine months and seven of the 10 components were solidly positive. There is also improvement in employment, which is contributing to a pick up in housing starts and consumer spending. Along with the positively sloped yield curve, oceans of liquidity, lack of investing alternatives, manageable valuations, (especially given the low level of rates) and an active merger calendar, I believe equities are still a good place to be.
Not only is there no recession in sight, but the combination of a 1%-2% inflation rate, 2%+ GDP and exceptionally low interest rates seems like a very good environment to me. Clearly valuations are not as attractive as they were, but I disagree with any comments about a bubble, although biotechs and pockets of technology are very expensive. Operating earnings for the S&P 500 grew 0.3% in Q1, well above expectations for a 5% decline, despite being weighed down by the 56% drop in earnings in the Energy Sector.
Timing and pace of a rate hike remain uncertain
The media and markets continue to obsess about the timing and extent of rate hikes. Most research I've seen suggests that the market overall is still in good shape at the onset of a tightening cycle and that the more volatile period for equities is after tightening is completed.
As David Rosenberg of Gluskin Sheff stated in his May 29 comments "the bull was gored only after the Fed took the funds rate from 1% to 5.25% from the summer of 2004 to the summer of 2006.....the real problems occurred following the last rate hike, not the first one, as is typical, cycle after cycle."
Ken Fisher had a nice comment in his monthly article in Forbes (April 13, 2015) when he said "Whatever you read lots about is surely priced in and easily ignored-a great answer for so many media-splattered topics." I couldn't agree more.
A few thoughts on active management
Barron's January 12, 2015 cover story "Return of the Stockpickers" argued that a rising interest rate environment would favor active management. The article cited a study by Nomura Securities which analyzed the period 1962 to 1981 when the 10-year note yield tripled, and "the median cumulative return for large company mutual funds was 62% better than the S&P 500."
I have no idea if either of those will happen again, but now that the market has tripled from its 2009 low I think things will settle down a bit and active managers will have a better chance to outperform. As Barron's noted in its story, more than a quarter of the Russell 2500 companies had negative net income. Owning those kinds of names is not a formula for long term investing success.
As for Peattie Capital, last year's best performing account returned 19.4% (net of fees), trouncing the S&P 500's 13.6% total return. The worst account returned 7.4% (net). I attribute this difference to the goals of the accounts, so they are made up different types of names. In 2015, the former is +1.3% through May, and the latter is +5.4%, more than doubling the S&P's total return. Note: these numbers are unaudited and past results are not a guarantee of future performance.
Broadly speaking, most clients want to participate in up markets and preserve capital in down markets. In other words, for most clients, beating an index is not the goal. That said, I am delighted that in many cases I have done so.
The best answer to "how to outperform an index" I know of was provided by David Swenson, Yale's Chief Investment Officer. According to him, managers need to:
- Know the overall environment
- Run concentrated portfolios
- Do extensive research on investments so as to know when a sell off is a buying opportunity
- Have patience
- Be willing to deviate from the index
Most professional money managers are unable or unwilling to do all these as far as I can tell.
One last thought on this topic is that most well known investors who have had long term success have had periods of underperformance. The current Barron's has an article excerpting profiles of three such managers from a new book "The Great Minds of Investing" by William Green. I recommend the article for anyone, and look forward to reading the book.
Stock picking continues to shine
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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
May 29.
This chart shows all PCM's recommendations for the past 47 months
showing an average return of +43.6%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Express Scripts ("ESRX") ESRX is the last independent Pharmacy Benefits Manager ("PBM"), and it trades at a discount to both the market and its nearest
(not precise) competitor, CVS. In a consolidating industry with demographic tailwinds and an agnostic platform, ESRX is unique and I would expect that discount to
close. In 2012 ESRX bought Medco, and promptly lost Medco's largest client, United Health, which may explain why ESRX's multiple has
remained below CVS'. However the
company has improved operations and has benefitted from an improving employment scenario. In addition, it is US centric, and its size enables it to drive
better (lower) prices from drug manufacturers for health plans, and ESRX shares in those savings. ESRX also operates a large mail-order and
specialty drug pharmacy so somewhat incongruously also benefits from those high drug prices. Earnings estimates for ESRX are $5.44 in 2015 and $6.03 in 2016 (Source: Barron's May 21, 2015) so the company trades barely above 14x forward estimates, while
CVS is on 17x and the market is roughly 18x. In addition, ESRX recently resumed a share buyback program. Shares have recently dropped from $91 to about $85, and for a large, dominant company like this one I wouldn't expect much more
of a correction, absent an overall market correction. In an environment where there are fewer values, I think ESRX represents a good risk/reward, and I recommend
buying shares up to $86. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
5/4/15
Align Technology
ALGN
Buy
$59.00
$60.67
2.8%
3/4/15
Sabre Corp
SABR
Buy
$21.60
$26.09
21.2%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$31.42
-17.5%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$9.64
-15.6%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$11.46
-16.7%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$48.70
50.1%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$12.47
-1.4%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$81.97
9.3%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$15.65
18.8%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$23.22
23.9%
12/5/13
Sealed Air
SEE
Buy
$31.50
$48.70
57.1%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$19.40
9.9%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$75.98
81.6%
10/2/13
JP Morgan
JPM
Buy
$52.00
$65.78
31.8%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$60.31
50.0%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$84.64
82.4%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$23.22
82.2%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$56.23
27.5%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$13.82
4.3%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$12.47
-1.0%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$55.64
100.2%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$23.22
105.6%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$12.47
36.3%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$111.81
122.5%
3/6/12
du Pont
DD
Buy
$50.50
$71.01
50.4%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$84.64
244.8%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$12.47
65.6%
10/3/11
Apple
AAPL
Buy
$50.00
$130.28
172.0%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$12.47
32.9%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$12.47
11.4%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
May 2015
+| Range of Returns |
April |
YTD |
|---|---|---|
| All PCM Accounts |
(4.5%) - 1.6% |
(0.6%) - 4.4% |
| S&P 500 |
0.9% |
1.1% |
The first month of the quarter is again difficult as several core positions have yet to report
In April, most Peattie Capital portfolios were down, as a couple core holding sold off materially. Royal Caribbean ("RCL") reported disappointing results and shares dropped 16% for the month. KVHI Industries ("KVHI") dropped 12% for no apparent reason. Among companies that have reported earnings, the resounding theme is that the U.S. dollar's strength has been a formidable headwind, and anemic growth abroad has cut into sales.
Of Peattie Capital's three largest holdings, only one has reported earnings so far. Sealed Air ("SEE") delivered solid growth despite the dollar's strength, and shares gained over 3% on April 30 after the report, a day when the S&P 500 dropped over 1%. The other two largest positions are Maquarie Infrastructure Trust ("MIC") and KVHI, and I remain optimistic that they will both deliver strong results as well.
KVHI has been a particularly volatile name, as it is a micro cap ($200MM) and has had several 35% corrections the past few years. This volatility is stressful in the short term, but I believe the company will be highly successful and patience will be rewarded.
For my most aggressive accounts I am adding shares of KVHI, and I am very comfortable adding shares of SEE and MIC at today's prices as well. As a point of interest, the portion of my son's college fund that I manage is entirely in these three stocks.
Q1 GDP soft, but there are pockets of strength
Q1 GDP was a dismal 0.2%, but this is an initial reading and is subject to revision. There were areas of strength, led by strong personal spending. Inventories were high which can be both a plus and a minus, and net exports were very weak, as a result of the U.S. dollar's strength and weakness abroad.
My own opinion is that the U.S. economy is doing much better than the GDP report suggests, and that the severe winter weather had a meaningul impact on the report. I expect significantly better GDP reports in the next few quarters.
I particularly liked the recent jobless claims report and the Employment Cost Index ("ECI"). The wage component of the ECI rose 0.7% and the benefits component rose 0.6%. The bond market may be paying attention to this also, as longer term yields have been rising (granted from a very low level). To date, signs of inflation have been non-existent, however a tightening labor market may be a precursor to that changing.
Bank stocks have behaved very well lately, which I also consider a very good sign. An improving economy will lead to increased loan demand, and a steeper yield curve means better net interest margins for banks. Wells Fargo ("WFC") and JP Morgan ("JPM") are my two favorite major banks, and most Peattie Capital portfolios own both.
Timing and pace of a rate hike remain uncertain
Rate hikes could begin with the June meeting, but I think that's highly unlikely. Furthermore, the studies I've seen show that stocks perform well during the early stages of a tightening cycle. Regardless of timing or pace, rate hikes have been debated by the the investment community for so long that there won't be any surprises for anyone.
Ken Fisher had a nice comment in his monthly article in Forbes (April 13, 2015) when he said "Whatever you read lots about is surely priced in and easily ignored-a great answer for so many media-splattered topics." I couldn't agree more.
Sell in May?
The six-month period beginning November 1 of a mid-term election year has averaged 15% (not annualized) and hasn't had a down period since 1946 (Source: Hays Market Outlook April 30, 2015). The period just completed keeps that streak intact, but was below the 15% average. The pre-election year six-month period beginning May, which has just begun, has averaged +2.3% and has been positive roughly 65% of the time since 1930 (Source: ibid).
While I'm not in the business of trading the calendar, I find some market patterns useful. In addition to this one, I note that small caps have begun underperforming, perhaps in anticipation of a June rate hike. As I've said, I think that is unlikely, and in some cases I am adding to existing small cap positions. However for new positions, I am more inclined towards larger names, and names with a below market forward multiple. That said, market gyrations create opportunities, and I won't hesitate to initiate a new position in a smaller name if I believe it is attractively priced.
Stock picking continues to shine
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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
April 30.
This chart shows all PCM's recommendations for the past 46 months
showing an average return of +44.9%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Align Technology ("ALGN") ALGN makes clear (invisible) braces and what teenager wouldn't prefer that? With a new CEO, a committment to
organic growth via its salesforce, low penetration rates domestically and abroad, recent collaborations which should accelerate growth the
next few years, and a recent earnings "beat", ALGN appears to be executing well and is positioned to replace metal braces. In addition, ALGN
has an ongoing $300mm share repurchase plan in place. While 2015 may be a "pause and reset year" with earnings per share holding steady near 2014's $1.78, 2016 estimates are around $2.20, with
steady increases therafter. ALGN has plenty of room for growth, and while there is competition, recent trends towards digitization and ALGN's
collaboration with digital dental imaging leader Sirona and compatibility with OmniCam should drive above consensus growth. According to an April
21 Morgan Stanley report, "digital customers use 4x the volume of non-digital customers and digital penetration is growing >500 bps per year." While I don't accept Wall St. research at face value, other sources and my own research support this notion. The shares have bounced
~10% past few weeks and so I am recommending buying them up to a slightly below-current-market price of $60, and will emphasize growth accounts rather than conservative or
income acoounts as the best fit for these shares. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
3/4/15
Sabre Corp
SABR
Buy
$21.60
$24.89
15.6%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$34.99
-8.2%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$10.33
-9.7%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$12.18
-11.5%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$45.60
40.6%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$13.49
6.6%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$79.40
6.0%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$14.97
12.3%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$23.10
22.3%
12/5/13
Sealed Air
SEE
Buy
$31.50
$45.60
47.2%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$21.18
20.0%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$68.06
63.1%
10/2/13
JP Morgan
JPM
Buy
$52.00
$63.26
26.9%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$56.43
41.0%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$82.76
66.9%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$23.10
81.2%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$57.78
28.6%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$14.55
9.8%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$13.49
7.1%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$58.72
108.7%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$23.10
104.5%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$13.49
%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$115.82
130.5%
3/6/12
du Pont
DD
Buy
$50.50
$73.20
54.8%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$82.76
234.2%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$13.49
79.2%
10/3/11
Apple
AAPL
Buy
$50.00
$125.15
160.7%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$13.49
43.8%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$13.49
20.6%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
April 2015
+| Range of Returns |
March |
YTD |
|---|---|---|
| All PCM Accounts |
(1.7%) - 3.4% |
(0.2%) - 8.1% |
| S&P 500 |
(1.8%) |
0.4% |
Great performance from big positions drove terrific March performance
Despite the nearly 2% drop in the markets in March, many Peattie Capital portfolios gained between 2%-4%, demonstrating the power of good stock picking. For the year, a number of portfolios have gained over 5%, trouncing the microscopic return of the S&P 500.
Several core holdings completed corporate actions or reported terrific earnings and shares powered ahead. KVH Industries ("KVHI"), one of Peattie Capital's largest positions for several years, reported and guided to a strong 2015. Shares jumped 15% on the news and are now up 20% for the year. KVHI is a good example of the importance of patience and knowing your companies well, as it has had several 25% corrections over the past few years. While these drops caused havoc with short-term performance, over the next couple years I expect them to more than make up for that.
Other big performers in March were Sabre Corporation ("SABR"), recommended a month ago at $21.60, which closed another asset sale and shares gained 13% for the month. Macquarie Infrastructure Trust ("MIC") paid its $1.02 quarterly dividend and shares bounced to $82. MIC remains Peattie Capital's single largest position and has more than tripled since I recommended it three years ago.
I continue to like these names and would like to buy more of each.
Stock pickers getting an opportunity
For Peattie Capital portfolios, there is a clear bifurcation between "conservative" portfolios consisting mostly of very large, recognizable names most of which pay dividends and more growth-oriented portfolios, which own smaller, less well known names that likely don't pay a dividend. While the former performed better last year, so far in 2015 the reverse is true.
For the most part, the rally from early 2009 has been "risk on/risk off" in nature. With a couple notable exceptions such as mining or energy, most styles and industries have delivered strong returns and anyone "buying the dip" or "buying and holding" has been profitable. That phase may be nearing an end, as various equity classes have performed so differently in the first quarter of 2015. If I'm right about this, good stockpicking will have an even better opportunity than usual to shine.
At the moment, I particularly like the NASDAQ, which is trading at an unusually slight premium to the S&P 500, has faster growth (15% vs. 5% for the S&P according to the March 9 Barron's), and doesn't contain some of today's laggards, such as the aforementioned energy. I would expect it to attract more funds if it's current outperformance continues. In addition, the third year of the Presidential cycle has historically provided the NASDAQ's strongest relative performance.
Economic news softer
Friday's unemployment report was a disappointment, with the only (somewhat) bright spot being an increase in wages. Broadly speaking economic data have been mixed, with GDP, manufacturing, and employment all growing, but at slower levels than previously. The West Coast port strike (now over) and surging dollar (holding steady at the moment) have no doubt contributed to this softness.
On the plus side, consumer behavior has been stronger, as seen in home and car sales for example.
In the first quarter last year GDP contracted 2.1%, but subsequently bounced back to +4.6% in the second quarter and +5% in the third. Who knows how the harsh winter will impact upcoming economic reports but my own view is that it has had a meaningful impact and that this year a similar pattern will emerge.
The never-ending debate regarding the onset of rate hikes continues to dominate financial markets, and economic data thus far give The Federal Reserve justification to do whatever it wants. I repeat that the conversation has been going on so long that as far as I'm concerned, it simply won't have a material impact, particularly if longer term rates don't spike.
Ken Fisher had a nice comment in his current monthly article in Forbes (April 13, 2015) when he said "Whatever you read lots about is surely priced in and easily ignored-a great answer for so many media-splattered topics." I couldn't agree more.
Reviewing the "Rule of 72"
The Rule of 72 is a simple way to think about how compounding works over time. Divide the number 72 by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double. Given an annual return it will tell you how long it takes to double your money, or, given a time frame, it will tell you the annual return needed to do so.
For example, if your money grows at 7% per year, it will take 10.2 years to double. Conversely, if you want to double your money in 8 years, you need to generate 9% annually to do so. Got it?
The Rule of 72 helps in thinking about how investments will grow over time and is particularly useful for those thinking about (or in) retirement wondering what their financial picture will look like.
Stock picking continues to shine
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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from
March 31.
This chart shows all PCM's recommendations for the past 45 months
showing an average return of +47.1%. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: There is no recommended stock for April. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested
them.
3/4/15
Sabre Corp
SABR
Buy
$21.60
$24.30
12.9%
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$35.33
-7.3%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$11.11
-2.9%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$11.39
-17.2%
9/1/14
Veeva Systems**
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$45.56
40.5%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$15.12
19.5%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$77.82
3.4%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$14.30
7.6%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$24.66
30.5%
12/5/13
Sealed Air
SEE
Buy
$31.50
$45.56
47.1%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$21.96
24.4%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$81.85
95.3%
10/2/13
JP Morgan
JPM
Buy
$52.00
$60.58
21.0%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$57.40
43.3%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$82.29
66.1%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$24.66
93.3%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$55.75
24.6%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$12.30
-7.2%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$15.12
20.0%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$52.03
86.4%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$24.66
118.1%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$15.12
65.2%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$117.10
133.0%
3/6/12
du Pont
DD
Buy
$50.50
$71.47
51.3%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$82.29
232.5%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$15.12
100.8%
10/3/11
Apple
AAPL
Buy
$50.00
$124.43
159.2%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$15.12
61.2%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$15.12
35.1%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
March 2015
+| Range of Returns |
February |
YTD |
|---|---|---|
| All PCM Accounts |
4.4% - 8.2% |
0.4% - 4.7% |
| S&P 500 |
5.4 |
2.2 |
Big Bounceback in February
February was a terrific month in the markets, and particularly strong at Peattie Capital. Gains were fueled by strong earnings reports from several large positions such as Sealed Air ("SEE") which gained 16% and Maquarie Infrastructure Trust ("MIC") which gained 10% in February. While I expect market volatility to continue, I believe both these names will deliver strong returns going forward.
A couple other core positions have yet to report earnings, and will be doing so in early March.
Economic news a touch softer
The Chicago Purchasing Manager's Index contracted in February, and the relentless winter is probably responsible for a minor disappointment in consumer spending. The West Coast labor dispute hasn't helped either. So there are reasons why the economy appears to be slowing a bit. Whether that impacts Janet Yellen's decision on the timing of a rate hike is anyone's guess, as is the markets response to that hike. With inflation under control and an improving labor picture, my own opinion is that the markets will not be derailed when that happens.
That said, valuations are not as attractive as they have been, and sentiment is running pretty high so the overall picture is a bit more mixed.
Time to sell equities and be more conservative?
A client recently asked me this, as his wife recently sold all her equities and bought bonds "to be more conservative". Having spent eight years of my life as a bond trader, my first comment is that no one has any idea where interest rates (and therefore bond prices) are going. Who would've thought that they would get this low, and stay this low for as long as they have? Who would've thought that interest rates would be negative in several countries around the world?
Eventually, and by that I mean sometime in the future, rates will "normalize" but I have no idea when that will happen nor how quickly it will advance once it starts. As rates rise, bond prices drop, so any portfolio owning them will drop in value. Not exactly what most people expect from a "conservative" portfolio. However, anyone holding those bonds until maturity (assuming the borrower doesn't go belly up) will get back 100 cents on the dollar, and will have been collecting coupons along the way. Unfortunately, those coupons are very low, barely 2% for US Government bonds (the most conservative) annually for the next 10 years. Not much, but at least 10 years from now you'll get your money back as long as you're still holding the bond.
In short, it's a very good time to be a borrower, and a very difficult time to be an investor in bonds. For the time being, the days of sitting back and collecting 4, 5, 6, 7%, risk-free are gone. My own bias is to find the right stocks, given how low the returns are in bonds and the potential for the principle value to drop when rates rise. Only partly in jest, I have been calling bonds "return-free risk".
Stock picking continues to shine
Regardless, I believe 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.
Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from February 27.
This chart shows all PCM's recommendations for the past 44 months showing an average return of +46.1%. Additional recommendations are available on request. This table does not include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Sabre Corporation ("SABR") Having just gone public last April, Sabre Corp. (SABR) is still proving itself as a public company. In addition, SABR just completed it's second divestiture and prior to the lockup expiring in October, the two largest shareholders
owned 80% of the company. So far, there has been lots of activity at SABR, most of which is now completed. SABR is a leading technology provider to the travel and hospitality industry, which typically grows at 1.5x GDP (Source: March 2 company presentation at Morgan Stanley's tech conference). The company's travel network is a steady, highly predictable cash-generating operation, with mid single digit
revenue growth and stable EBITDA margins around 42%. The Solutions division is expected to grow 12-14% for the next several years, with EBITDA margins growing from 30% in 2013 to 36% in 2014 and into the high 30's by 2017, and "that's not a limit" (IBID). SABR has completed much of it's capital spending
program, and free cash flow is expected to exceed $500mm by 2017 from $293mm in 2014. I think SABR is underowned and has been held back by the aforementioned shareholder overhang and various divestitures. The company has been deleveraging, and now that it is operating with a clean slate, I think investors will be more open to owning shares. Good things tend to happen when companies generate so much free cash, and I recommend buying SABR up to $21.60. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
and short sale candidates which are only appropriate for clients who have requested them.
2/5/15
Cogent Communications
CCOI
Buy
$38.50
$36.72
-4.6%
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$11.27
-2.8%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$12.63
-9.5%
9/1/14
Veeva Systems
VEEV
Buy
$30.00
$30.87
2.9%
8/5/14
Sealed Air
SEE
Buy
$32.70
$47.13
44.9%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$12.83
1.3%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$82.21
9.1%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream**
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$15.62
21.8%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$23.42
24.0%
12/5/13
Sealed Air
SEE
Buy
$31.50
$47.13
51.7%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$23.53
33.3%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$76.42
81.9%
10/2/13
JP Morgan
JPM
Buy
$52.00
$61.28
22.3%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$55.93
38.2%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$78.61
57.3%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$23.42
83.7%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$59.48
31.9%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$12.69
-4.2%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$12.83
1.8%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$61.12
116.7%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$23.42
107.3%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$12.83
40.2%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$124.71
148.2%
3/6/12
du Pont
DD
Buy
$50.50
$77.85
63.0%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$78.61
215.5%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$12.83
70.4%
10/3/11
Apple
AAPL
Buy
$50.00
$128.46
167.3%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$12.83
36.8%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$12.83
14.7%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
February 2015
+| Range of Returns |
January |
YTD |
|---|---|---|
| All PCM Accounts |
(7.5%) - (2.5%) |
(7.5%) - (2.5%) |
| S&P 500 |
(3.1%) |
(3.1%) |
Surging dollar pounds portfolios
2015 is off to a rough start, as the dollar's strength has gutted earnings growth at multinational companies. In my opinion, there is more dollar strength ahead. In addition to an improving US economy with a rate hike looming, global economies, broadly speaking, are soft, and a variety of central banks are considering additional Quantitative Easing. What's different going forward is that US companies won't be caught by surprise and are taking steps (hedging) to protect against further dollar appreciation from today's levels.
Peattie Capital portfolios own a number of these companies, and in January they suffered. Most accounts were down mid single digits. However I believe that improving corporate fundamentals will overcome the dollar's rise, and I am not making any material changes to portfolios. There are numerous advantages to a strong dollar; it's the sudden and rapid rise that has been difficult to manage.
2014 had a down January, and subsequently rose over 14%
Overall, the S&P 500 was down 3.1% in January, but the first five days were positive and, more importantly, the December low held. As I've said many times, January is a very tricky month because of a number of major cross-currents such as re-balancing/re-allocating between asset classes.
In addition, we've now experienced two consecutive down months, which has happened occasionally the past few years and doesn't concern me. That said, I expect volatility to continue.
Broadly speaking the U.S. economy continues its slow but steady expansion. Recent GDP growth was a bit below expectations but still solidly positive, jobless claims at the end of January were the lowest since April 2000, and consumer spending jumped to its fastest pace since early 2006 at 4.3%. While there have been some notable earnings misses so far, I believe that the underlying strength is good.
As for oil, according to a recent Barron's article (Market Week Jan 26, 2015),"Oil prices have fallen more than 30% in a six-month period a total of six times in the past 30 years, including the recent slump. In four of the five previous instances, the S&P 500 was trading higher six months after the collapse and was up by double digits 12 months later....the one exception was in 2001 in the tech-stock crash." I continue to believe that, in aggregate, the benefits of falling oil prices outweigh the negatives.
The Land of Tall Trees
Two items recently popped up on my radar that bear watching. First, according to John Osterweiss, in 2014 the top 20 stocks (in performance impact) of the S&P 500 accounted for 41% of the index's return....and in the second half of the year they accounted for 57% of the index's return. Stated differently, it was a very narrow market, which is mildly concerning.
The second item is that correlations between ETFs are high, calling into question the ability to generate meaningful diversification with them. One of Peattie Capital's core beliefs is that investors incorrectly believe they are protected from a bear market because they are "diversified". To my way of thinking that is a fallacy, and is primarily why Peattie Capital believes in iconic stock selection, or what I sometimes call "The Land of Tall Trees." Here are a few correlation coefficients with the S&P 500 from 12/31/07-9/30/14 (Source: Horizon Kinetics Market Commentary October 2014).
| IYW | iShares US Technology | 0.903 |
| RTL | iShares Retail Real Estate | 0.733 |
| RTH | Market Vectors Retail | 0.864 |
| BJK | Market Vectors Gaming | 0.810 |
| IYH | iShares US Health Care | 0.825 |
| IYE | iShares Energy | 0.795 |
| ITB | iShares US Home Construction | 0.680 |
| IYT | iShares Transportation Average | 0.870 |
A few portfolio comments
Macquarie Infrastructure ("MIC") is the single largest holding at Peattie Capital, and it has been my recommended stock twice in the past few years, first in November, 2011 at $27.71 and secondly in June 2013, at $53.50. Subsequently the shares (technically "units") have returned 190% and 44% resepectively. This morning MIC announced an accretive acquisition, and that it expects to raise the payout again this year even though shares already yield over 5%. Needless to say, MIC has been a huge winner, and the units are up 4% this morning as of this writing.
Royal Caribbean ("RCL") has also been a huge performer since I recommended it in November, 2013 at $42.75. The dollar's strength hurt RCL, but the company believes the drop in oil prices perfectly offsets that, showing a 10-year chart of these two assets' performance to demonstrate that belief in their recent earnings presentation. RCL also reiterated its guidance for a second consecutive 40% gain in EPS this year, and with the shares down 12% from their recent high I believe this is a good level to add to positions.
A number of accounts own Fairway Markets Group ("FWM") which I began buying earlier this year. FWM shares plummeted from over $28 18 months ago to a recent low of $2.25 in November, despite reasonably good revenue growth which currently runs over $800mm annually. I applaud FWM's Board for making some managerial changes and also cleaning up the balance sheet, which I think are steps in the right direction. I was planning on making FWM my recommended stock, but having gained over 100% in the past three months, it has come too far too fast, so I will hold existing shares and listen closely when FWM reports earnings this week. FWM still trades below its peer group on a price/sales basis, so there may still be room for further appreciation.
Stock picking continues to shine
Regardless, I believe 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.
Here is an updated chart of recent Peattie Capital recommended stocks, using closing prices from January 30. Additional recommendations are available on request. This table does not include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
> Recommended stock: Cogent Communications ("CCOI") Internet Service Provider Cogent Communications ("CCOI") has an opportunistic management and an extensive history of
growth. However in 2014 the shares were down over 10% on concerns about "net neutrality" and revenue growth dropping from high teens
to ~10%. Even so, EBITDA margins have been expanding are now in the mid 30%s. The Founder (and CEO) Dave Schaeffer owns nearly 4mm shares, and has tied his compensation to future revenue
(15%) and EBITDA (20%) growth. In addition, the company has plans to return $450mm to shareholders, which is nearly 30% of the current market
cap. With resolutuion (or at least, some action) on net neutrality from the FCC this week, it looks like CCOI shares are well positioned and
have begun moving. Even if this is a false start, the company pays a $1.24 dividend so investors are paid 3.2% to wait. I recommend buying CCOI up to $38.50. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
This chart shows all PCM's recommendations for the past 43 months showing an average return of +46.1%.
The total return on the S&P 500 from July 2, 2011 through January 30, 2015 was approximately +55%.
and short sale candidates which are only appropriate for clients who have requested
them.
1/5/15
Monmouth Realty
MNR
Buy
$11.60
$11.81
1.8%
11/4/14
Marine Harvest
MHG
Buy
$13.95
$13.03
-6.6%
9/1/14
Veeva Systems
VEEV
Buy
$30.00
$28.76
-4.1%
8/5/14
Sealed Air
SEE
Buy
$32.70
$40.50
24.6%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$12.10
-4.3%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$80.64
7.1%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream
SODA
Buy
$43.50
$18.06
-58.5%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$15.58
14.6%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$23.47
24.3%
12/5/13
Sealed Air
SEE
Buy
$31.50
$40.50
30.6%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$24.85
40.8%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$75.55
79.9%
10/2/13
JP Morgan
JPM
Buy
$52.00
$54.38
8.3%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$54.32
34.5%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$71.46
43.9%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$23.47
84.1%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$61.40
33.8%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$10.33
-22.0%
1/6/13
Tronox Limited**
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$12.10
-4.0%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$56.44
99.3%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$23.47
107.7%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$12.10
32.2%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$116.70
132.2%
3/6/12
du Pont
DD
Buy
$50.50
$71.21
49.9%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$71.46
189.7%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$12.10
60.7%
10/3/11
Apple
AAPL
Buy
$50.00
$117.16
143.8%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$12.10
29.0%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$12.10
8.1%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
January 2015
+| Range of Returns |
December |
YTD |
|---|---|---|
| All PCM Accounts |
(0.5%) - 1.2% |
7.4% - 18.2% |
| S&P 500 |
(0.5%) |
11.4% |
A solid month to end 2014
Peattie Capital portfolios had a strong December, with most accounts gaining about 1%. 2014 was another solid year for Peattie Capital clients, with many accounts gaining in the low to mid teens for the year on a net basis. There was an unusually wide range of returns as portfolios with smaller names were in the mid-high single digits, and those with larger names and dividends were the best performers, with several of these gaining over 20%.
It's worth mentioning that small-cap indices were only up low single digits for the year, and I am delighted that Peattie Capital portfolios with mostly small cap names compare so favorably with them.
Overall, I grade myself "A+" for my market call as I repeatedly stated that the environment for U.S. equities remained favorable. In the January 2014 newsletter I even suggested 2074 as a year-end closing level for the S&P 500. In December's newsletter I stated that volatility would be particularly high in the first half of the month, and that I expected to see 2% on the 10-year note before 3%. Check and check.
However on a stock selection basis I grade myself only a "B+" as a couple core holdings underperformed on a relative basis, and one, KVH Industries ("KVHI") was down slightly on the year. One recommended stock, Sodastream (SODA") was particularly bad, and has become my single worst recommendation ever, although it is only a very small position in the few portfolios that own it.
On the plus side, Royal Caribbean ("RCL") has gained 95%, MakeMyTrip ("MMYT") 47%, Sealed Air ("SEE") 38% and ChipMos ("IMOS") 28%, since I recommended them between 12-14 months ago.
Steady economic improvement will overcome volatility
The steady improvement in the U.S. economy continues, with a Q4 GDP reading of 5%. Of particular note are the uptick in jobs, autos, and both consumer and business sentiment. In addition, corporate balance sheets remain in excellent condition,
commodity prices are softening, financing costs are low, and the manufacturing renaissance continues. All in all, it's still a good environment overall for
U.S. equities, with the caveat that valuations are not as attractive as they have been.
Volatility is normal, and I expect it to continue. In 2014, sentiment indicators such as the AAII survey were very
good indicators, as the market dipped several times when investors became too optimistic. More recently the market's performance seems to be correlated to oil prices, and
I would welcome a day with a drop in oil prices and a rising (or at least not falling) market as I believe lower oil prices are more
beneficial than harmful in the aggregate. Most prognosticators I have read are predicting another year of high single digit to low double digit gains for the
major
indices which seems reasonable, and the only issue I have with it is that the consensus is almost always wrong. My view is that as long as the
economic backdrop remains favorable, I would expect markets to continue trending higher. Calendar comments January is a tricky month because there are so many cross currents at work in the markets, so I don't read
anything into
this year's weak start. After all, last year January was down 3.6%. I'd like to see both January and February be positive, and I am also watching
to see if the markets take out the December low during the first quarter. I repeat what I said last month, which is that while Peattie Capital is far more concerned with individual stock and industry fundamentals than the calendar, it's worthwhile to pay attention when patterns are this strong. Historically, the third year of the Presidential cycle is by far and away the strongest of the four, with an average gain since 1949 of 16.9% for the Dow, 17.1% for the S&P 500, and, from 1971, 30.9% for the Nasdaq (source: Jeffrey Hirsch 2015 Stock Trader's Almanac).
In addition, there hasn't been a down Pre-Presidential year since 1939 when the S&P was down 5.5%, probably due to war. That said,
the seventh year of a presidency tends to be weaker than all Pre-Presidential years (ibid). Stock picking continues to shine Regardless, I believe 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. Here is an updated chart of recent Peattie Capital recommended stocks, using closing prices from December 31. Additional recommendations are available on request. This table does not
include speculative PERFORMANCE OF PCM RECOMMENDED STOCKS
Recommended stock: Monmouth Real Estate Investment Corp ("MNR") MNR is a real estate investment company with single-tenant net-leased industrial
properties (warehouses) primarily in Texas, Florida,
and along the eastern seaboard. 87% of revenues come from investment-grade tenants such as Anheuser-Busch, Home Depot,
Coca-Cola, and Sherwin Williams, who typically sign seven year leases. The resulting income stream is highly
predictable, and MNR sailed thought the Great Recession without cutting the dividend.
Earnings grew 26% last fiscal year. MNR is smaller than many competitors, which probably explains the 150 basis point yield premium compared
to a couple of them, Duke Realty ("DRE") and Prologis ("PLD"). In addition, MNR gets over 40% of its revenues from Federal Express
("FDX") which would usually deter my interest but given the growth in online spending, the dearth of new malls and shopping centers,
and the pending completion of the expanded Panama Canal which will drive demand for east coast ports and storage, I believe the risk/reward
is in the investor's favor. Management owns 15% of the shares and there has been some recent insider buying. MNR is especially appropriate for income-oriented accounts, but it has a good chance for appreciation as well,
and I recommend buying it up to $11.60. Please don't hesitate to contact me with question or comments and please let me know if you'd like to be removed from distribution.
This chart shows all PCM's recommendations for the past 42 months showing an average return of +46.1%.
The total return on the S&P 500 from July 2, 2011 through December 31, 2014 was approximately +58%.
and short sale candidates which are only appropriate for clients who have requested
them.
11/4/14
Marine Harvest
MHG
Buy
$13.95
$14.00
0.4%
9/1/14
Veeva Systems
VEEV
Buy
$30.00
$26.41
-12.0%
8/5/14
Sealed Air
SEE
Buy
$32.70
$42.97
32.2%
8/5/14
KVH Industries
KVHI
Buy
$12.65
$12.65
0.0%
7/3/14
Texas Pacific**
TPL
Buy
$160.00
$191.03
19.4%
6/3/14
Ingredion
INGR
Buy
$76.50
$84.84
12.0%
4/2/14
Questcor*
QCOR
Buy
$68.00
$89.15
31.5%
4/2/14
SodaStream
SODA
Buy
$43.50
$20.12
-53.7%
3/5/14
Whistler Holdings
WSBHF
Buy
$14.20
$17.41
27.5%
1/8/14
ChipMOS
IMOS
Buy
$19.00
$24.26
28.4%
12/5/13
Sealed Air
SEE
Buy
$31.50
$42.97
38.5%
12/5/13
Make My Trip
MMYT
Buy
$17.65
$25.99
47.3%
11/5/13
Royal Caribbean
RCL
Buy
$42.75
$82.43
95.3%
10/2/13
JP Morgan
JPM
Buy
$52.00
$62.18
23.3%
9/6/13
Owens-Illinois**
OI
Buy
$29.25
$30.05
2.7%
8/3/13
Cedar Fair, L.P.
FUN
Buy
$43.50
$47.83
19.6%
6/5/13
Macquarie Infra.
MIC
Buy
$53.50
$71.09
43.2%
4/2/13
ChipMOS
IMOS
Buy
$12.90
$24.26
90.4%
4/2/13
Energy Transfer Partners
ETP
Buy
$50.75
$65.00
45.8%
3/4/13
Kohlberg, Kravis, Roberts**
KKR
Buy
$18.10
$23.30
28.7%
2/3/13
Weatherford Int.
WFT
Buy
$13.25
$11.45
-13.6%
1/6/13
Tronox Limited
TROX
Buy
$20.00
$23.88
29.4%
12/3/12
KVH Industries
KVHI
Buy
$12.60
$12.65
0.4%
12/3/12
Telular*
WRLS
Buy
$10.06
$12.74
28.6%
10/3/12
Seagate Technology
STX
Buy
$30.00
$66.50
132.8%
9/4/12
Arcos Dorados**
ARCO
Buy
$13.25
$11.92
-7.8%
8/4/12
ChipMOS
IMOS
Buy
$11.50
$24.26
114.6%
7/3/12
SeaDrill**
SDRL
Buy
$37.50
$35.60
11.6%
6/6/12
Mako Surgical*
MAKO
Buy
$23.25
$29.53
27.0%
5/4/12
KVH Ind.
KVHI
Buy
$9.15
$12.65
38.3%
4/6/12
SBA Com.
SBAC
Buy
$50.25
$110.76
120.4%
3/6/12
du Pont
DD
Buy
$50.50
$73.94
55.3%
2/9/12
Credicorp**
BAP
Buy
$119.00
$133.17
16.0%
1/12/12
Genesis Energy**
GEL
Buy
$28.50
$44.03
75.8%
12/2/11
Telular*
WRLS
Buy
$6.96
$12.74
91.2%
11/6/11
Carters**
CRI
Buy
$36.00
$71.56
99.7%
11/6/11
Family Dollar**
FDO
Buy
$58.00
$69.28
22.1%
11/6/11
Macquarie Infra.
MIC
Buy
$27.71
$71.09
188.4%
10/3/11
KVH Ind.
KVHI
Hold
$7.53
$12.65
68.0%
10/3/11
Apple
AAPL
Buy
$50.00
$110.38
130.2%
10/3/11
Family Dollar**
FDO
Buy
$50.86
$69.28
39.2%
8/6/11
Carters**
CRI
Buy
$29.99
$71.56
139.7%
8/6/11
KVH Ind.
KVHI
Hold
$9.38
$12.65
34.9%
7/2/11
Telular*
WRLS
Buy
$6.06
$12.74
123.1%
7/2/11
SeaDrill**
SDRL
Buy
$35.73
$35.60
26.3%
7/2/11
KVH Ind.
KVHI
Hold
$11.19
$12.65
13.0%
The risk of loss always exists, and past results
are not necessarily indicative of future results.
* Company acquired, position closed.
** Position closed at manager's discretion
Questions About Our Commentary?
We're always happy to discuss our market views and investment approach.
Contact Us