PCM Newsletter Archives





December 5, 2016


What a month....

The S&P 500 gained 3.4% in November and most Peattie Capital portfolios also had a good month, with more aggressive accounts performing significantly better than the S&P 500. Small cap equities were particularly strong, rallying for an unprecedented 14 consecutive days after the election and gaining 11% for the month.

However, the Bloomberg Barclays Global Aggregate bond index lost $1.7tn, its worst performance since at least 1990, (Source: Financial Times, Dec. 1), and the U.S. 10-year note lost 2.5% for the month.

Prior to the election, the markets were down eight consecutive days, and the subsequent bounce is being largely attributed to hopes for increased infrastructure spending, less regulation, and lower taxes. In addition, a variety of investors have held siginificant amounts of cash, and I would expect that money to be put to work and support equity prices, at least through year end.

In addition to the election results, the OPEC oil production cuts and pending rate hike from the Federal Reserve are also significant developments which are driving sector rotation. The winners so far are financials, energy, and other cyclicals such as materials. Losers have been defensive sectors such as utilities and telecom. I would expect technology names to benefit as well, but in the past few days shares of many leading technology companies have been hit very hard.

My overall takeaway is that the turbulence and rotations will continue, as the uncertainty that accompanies a new administration weighs on the markets. My biggest concern is that higher rates will be a headwind to multiple expansion and companies will need to have better than expected earnings growth for shares to appreciate meaningfully.

A Little History

There have been a number of post election bounces such as 1992 (Bill Clinton's "Don't Stop Thinking About Tomorrow") and also 2008 (Obama's "Hope and Change") which were followed by extreme volatility. While some are likening Trump to Reagan, I think it's important to understand the differences between the environments of 1980 and today.

Here's how Jim Grant (Grant's Interest Rate Observer, Nov. 25, 2016) summarized the differences: "Reagan came into office with GDP growth dead in the water, the inflation rate pushing 12%, the jobless rate topping 7.2%, and the 10-year Treasury at 12.5%. The public debt weighed in at 25.5% of GDP and the S&P traded at nine times earnings. Expectations were low and borrowing capacity was high....Nowadays growth is running at 2.9%, the inflation rate at less than 2%, the jobless rate at 4.9% and the 10-year Treasury yield at 2.32%. The public debt amounts to 76.5% of GDP, while the S&P 500 trades at 20.6 times earnings. Expectations are high and borrowing capacity...is much reduced."

In other words, there was a lot of room for improvement then, whereas today both equities and bonds are much more expensive. Several studies I've seen conclude that a traditional 60/40 (equities/bonds) will generate annual returns of only 2%-3% range as a result of today's relatively expensive starting point. In addition, the U.S. has far less room to borrow (theoretically) than it has in the past, which may handcuff the implementation of Trump's policies.

The dilemma of the growth investor

Several Peattie Capital growth names have come under severe selling pressure the past few days. For example, Ellie Mae ("ELLI") which sells software packages to banks and other mortgage providers to standardize and simplify the mortgage application process, has fallen nearly 30%, from a nearby high of $110 at the end of October to $80 today.

Veeva Systems ("VEEV") reported a spectacular quarter on Nov 15, and shares spiked 14%, from $42 to $48. However in the first two days of December shares dropped back to $43. High multiple hyper growth stocks are particularly volatile, but this seems like an overreaction to me. Google ("GOOG") and Facebook ("FB"), two prominent names in most portfolios, have also come under serious selling pressure.

In IRA accounts I have sold some shares of each of these names, but in taxable accounts I am holding shares as selling would not only create a large short term capital gain, but also present the question of when to get back in. Each of these names is well positioned and I believe they will reward shareholders the next few years. However in the short term they are contributing to weak performance.

Another ETF caution flag

Monmouth Realty ("MNR") has been a Peattie Capital recommended stock twice in the past two years (see table below), with wonderful results. In MNR's Nov. 29 earnings call, the CEO compared ETFs to CDOs, synthetic CDOs, and CDOs squared, (instruments widely believed to be at the heart of the 2008 financial meltdown) and also stated that robo advisors "buy high and sell low, they don't know what they own, and they create real opportunities to invest."

I couldn't agree with him more, which is one reason why I've made a point of discussing the risks of ETFs in many newsletters this year. For anyone interested, the comments begin at the 49:30 time of the call, which is available on the company's website www.mreic.com.

Stock picking is still a good way to go

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

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

Here is an updated version of recent Peattie Capital recommended stocks, using closing prices from November 30.

This chart shows all PCM's recommendations for the past 23 months showing an average return of 15.4%. The total return of the S&P 500 in the comparable period is approximately 10.6%.

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


11/3/16 Cogent Communications CCOI Buy $37.00 $37.45 1.2
10/5/16 AMC Entertainment AMC Buy $31.50 $33.95 7.8%
7/6/16 Monmouth Realty MNR Buy $13.40 $14.05 6.0%
7/6/16 Broadcom AVGO Buy $151.00 $170.49 12.9%
7/6/16 Wells Fargo Pref L* WFC/PRL Buy $1340 $1305 (1.2%)
6/2/16 Veeva Systems VEEV Buy $33.65 $46.46 38.1%
4/5/16 LSB Industries* LXU Buy $12.35 $9.75 (21.1%)
4/5/16 Marine Harvest MHG Buy $15.50 $17.90 19.2%
3/3/16 KVH Industries* KVHI Buy $9.25 $9.06 (2.1%)
3/3/16 Howard Hughes Co. HHC Buy $99.00 $113.86 15.0%
1/6/16 Align Tech ALGN Buy $65.00 $93.05 43.2%
11/2/15 ViaSat VSAT Buy $65.50 $71.28 8.8%
9/2/15 Google GOOG Buy $590 $758.04 28.5%
8/4/15 DexCom, Inc* DXCM Buy $85 $84.20 (0.9%)
7/2/15 Cogent Communications CCOI Buy $32.50 $37.45 20.8%
6/2/15 Express Scripts* ESRX Buy $86.00 $81.55 (5.2%)
5/4/15 Align Technology ALGN Buy $59.00 $93.05 57.7%
3/4/15 Sabre Corp* SABR Buy $21.60 $26.57 25.5%
2/5/15 Cogent Communications CCOI Buy $38.50 $37.45 3.7%
1/5/15 Monmouth Realty MNR Buy $11.60 $14.05 30.5%
NOTES: Gains include dividends. All numbers are unaudited.
The risk of loss always exists, and past results
are not necessarily indicative of future results.
*Position sold at manager's discretion

Recommended stock: Abbott Labs ("ABT")

Abbot Labs has gone through a series of strategic changes the past few years, culminating in the break up of the company into two (Abbot and Abbvie) in 2013. Currently the company is in negotiations to buy two companies, Alere and St. Jude Medical, the latter is expected to close before year end. It also owns 13% of Mylan, of the controversial EpiPen pricing scandal, which has probably contributed to ABT's -15% return this year.

However, ABT has a long and storied history of growing its intrinsic value, and I particularly like that it has paid a dividend every quarter since 1924 and raised the payout every year since 1972 (current yield 2.6%).

CEO Charles White has been actively buying shares recently, with a $45mm purchase in July at an average price of $43.12 and another $15mm in November at $40.54. Subsequently the shares have traded down to the high $30's, possibly a result of a soft earnings report from rival Medtronic in November. White is highly regarded and was named by Barron's earlier this year to its list of the world's 30 best CEOs.

At current prices ABT's shares represent a good opportunity for long term investors and I recommend buying them up to $38.50

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.


November 3, 2016


October 5, 2016


September 6, 2016


August 1, 2016


July 6, 2016


June 2, 2016


May 4, 2016


April 5, 2016


March 3, 2016


February 2, 2016


January 6, 2016



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