December 4, 2020
2020 has been a wonderful year at Peattie Capital
While 2020 has been a good year for US equity investors, it’s been another reeeeally terrific one for Peattie Capital clients. Through November, most accounts have gained roughly 25% net of fees, with the single best account up 50%. By comparison, the total return of the S&P 500 is 14%. Past performance is not a guarantee of future returns.
Overall, I still like the environment….
To my way of thinking the underpinning of this exceptionally strong period for equities is the combination of low absolute level of interest rates with the extraordinary amounts of liquidity that have been provided by the world’s central banks. Most commentary from economic leaders suggest these conditions will continue, and given the ongoing pandemic and the number of people, companies and industries suffering because of it, that’s not surprising.
Historically massive liquidity has been an ingredient for inflation, and inflation would lead to higher interest rates, a headwind for equities. However, so far there are no signs of that. If the yield on the 10- year treasury note jumped to say, 2%, (today it is 0.93%) that would represent a reasonable alternative to equities, and also cap the market’s multiple (currently about 21x forward estimates according to Ed Yardeni in the November 30 Barron’s). Technology, overall, is deflationary, which could be a contributing factor to quiescent inflation.
And I think the US economy might be healthier than people think
The early November GDP report was loaded with strong data: durable goods +82%, capital expenditures +78%, housing +59% annualized, and the consumer savings rate has jumped dramatically, (14% in September) which will support an economic rebound as those savings are spent. I view the recent strength in equity markets as bullish as the rally has broadened to include more sectors in addition to tech and areas of health care. Note that in November the S&P 500 gained about 8%.
At some point, overwhelming debt, especially if rates go significantly higher, could be problematic, and this possibility bears watching. However for now my takeaway is that the combination of extremely low rates, plenty of liquidity, and an improving economy with pent up demand is a good backdrop for equities.
Peattie Capital prefers stock picking
That said, I maintain that index investing is useful but limited, and this year, once again, has demonstrated the value of owning the right companies and avoiding the wrong ones.
Owning the index means owning many companies, some are household names, that haven’t invested in research and development and are now on the wrong side of change/disruption. Also many have borrowed to buy back shares. Some have done both. This is not a long-term winning strategy, although there may be some short-term benefit to shareholders.
While growth companies have had a bit of a slowdown in Q4, the trends in new and disruptive industries such as electric vehicles, artificial intelligence, streaming, and fintech are powerful, global, and long lasting. I expect to continue emphasizing growth/disruption, at least for the time being, as I believe we are still in the midst of a version of an “industrial revolution” in which the migration to all things digital will be a dominant theme.
Note to self: stay on the right side of change!!!
New board members at a widely held position
A couple weeks ago one of my favorite investors, a hedge fund founder who has several billion dollars under management, joined the Board of one of Peattie Capital’s holdings. He only has about 10 positions in his portfolio, and last year another company where he was on the Board, also a Peattie Capital holding, was sold at a huge premium. Alas, the sale was for cash and closed in early 2020, creating a massive taxable gain for Peattie Capital holders.
A big tax bill is good as far as problems go, and normally I wouldn’t let the tax “tail” wag the investment “dog”. However, having such a large realized (and short term) taxable gain in 2020 has informed my thinking about portfolio construction and holding periods in taxable accounts this year.
Two days ago this company announced another new board member, who also has extensive merger and acquisition experience. While I would be happy if history repeats (who wouldn’t?) that’s not why I own the company. If that happens I would expect gains to be long term, not short term.
A couple anecdotes
Last week Peru issued a 100 yr. sovereign bond with a 3.23% coupon. This is an amazingly low borrowing rate for a country that has had three presidents in the past two weeks and eight sovereign defaults in the past 200 years (Source: Grant’s Interest Rate Observer, November 27). Man, is this world ever starved for income!
I read recently that something on the order of 80% of US wealth is held by people over 60. At that stage most investors are thinking more about return OF principal instead of return ON principal. The demand for steady income will likely increase.
If the Republicans hold the Senate, it will be the first time since 1900 that we’ve had a Democrat in the White House with a Republican Senate and Democratic House. (Source: Bespoke Investments)
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future”
– Warren Buffett
In June Goldman Sachs downgraded Tesla (“TSLA”) shares to neutral. At the time they were trading a little below $200. Wednesday afternoon Goldman upgraded TSLA to buy with the shares trading about $570. Consistent success trading in and out is extremely difficult and well beyond my abilities. Not to pick on Goldman, but identifying long term winners and staying with them has been a hallmark of Peattie Capital’s success.
Stay safe and healthy and feel free to contact me with any questions or comments.