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.

Best regards,

Bill

August 30, 2020

2020 continues to be a most unusual year, and the most consistent question I get is how the "market" has managed to be so strong in the face of so much bad news and uncertainty. My answer is that Peattie Capital believes in a "market of stocks" not a "stock market". Said differently, over time, owning the right businesses will provide the best chance of investment success and I recall Warren Buffett's comment that temperament, not intellect, is the most important attribute of the successful investor.

Through August 28 it's been another terrific year for Peattie Capital performance-wise, with net returns ranging from 11% to 33%, and most accounts clustered around gains in the high teens, about double the S&P 500's total return of approximately 9.5%. Please note that past performance is not a guarantee of future returns.

"If you don’t take change by the hand, it will take you by the throat.” Churchill

I couldn't agree with Churchill more, and among the best decisions I've ever made for Peattie Capital clients was to emphasize disruption/change about five years ago. I expect to continue to focus on companies/industries that are undergoing massive (or "jagged") change. According to an August 18 Lex column in the FT ("Tech rally: pricey party) average sales growth across the S&P 500 has fallen to zero, whereas revenues at the largest software companies are expected to grow 17% this year, and much of that revenue (83%) is recurring.

To be sure, some tech names are trading at extreme valuatuions (30x sales, for example), and questions have also come in about "taking some off the table." Selling Amazon or PayPal might feel good for a minute or two, but doing so will not only create a massive taxable gain, but also raise the question as to when to get back in. Overall, I remain comfortable owning names that I believe will be longer term winners.

No doubt there will be pullbacks and volatility, but the recent earnings season was good, and bonds are still "return free risk" as far as I'm concerned. So for now, I maintain that digitization and the massive enterprise-wide infrastructure overhaul to the cloud is a good place to be. Allocating some portion of investable assets to disruption/change is a very good idea.

Some of the other questions I've been asked recently by clients/prospects

Will we go back to normal?

I think some areas will eventually go back to what they were before Covid, such as leisure travel/tourism. However, other trends have accelerated, and will remain in place. Shopping and banking online come to mind. I don't think office buildings will be as crowded as they were, and commercial real estate firms and the banks that have exposure to them, are "no fly" zones for the time being.

Who knows what other changes we might see? The retailer REI decided to sell it's brand new (and unused) headquarters building on eight acres in Bellevue, Wa. In announcing the decision, CEO Eric Artz said “The dramatic events of 2020 have challenged us to reexamine and rethink every aspect of our business and many of the assumptions of the past. That includes where and how we work. As a result, our new experience of “headquarters” will be very different than the one we imagined more than four years ago.” I believe more companies will rethink the idea of traditional headquarters.

Who will win the election?

I don't trust the polls, and as far as I'm concerned, a lot can happen between now and November. I'm curious about how the House and Senate turn out, but not really concerned about how the market will perform under a Democratic administration. Historically markets have been able to perform equally well under either party.

I think the underlying trends that are shaping (well, reshaping) society are becoming more deeply entrenched, and that will continue regardless of who's in the White House.

With all this liquidity, wouldn't you expect to see inflation? If so, would that be bad for the markets?

That's a reeeeaalllly good question and I don't have an answer as to why inflation has been dormant. Chairman Powell's recent policy change to accept/encourage higher inflation suggests to me that interest rates will remain low for an extended period of time. Inflation would likely drive up interest rates, and yes, I think broadly speaking that would be a headwind for equities. Predicting the direction of interest rates is waaaaaay beyond my ability, but today's absolute level of rates and the shape of the US yield curve suggest inflation isn't a concern right now.

Did you see (sic) what Cramer said about covid and non-covid stocks?

No, I didn't. I don't watch (or listen to) financial mainstream media. I consider it entertainment, not analysis, and it doesn't help me identify investment opportunities.

Updates on a few positions

In the May 29 newsletter I mentioned adding Twitter ("TWTR") and Tesla ("TSLA"). Since then, TWTR has gained roughly 33% and TSLA has gained about 165%.

TWTR reported strong user growth and has also stated publicly that they are studying ways to alter their business model. I think this is a work-in-progress and I am happy to continue buying shares even at today's levels.

The bull case for TSLA remains that a) the world is going electric where TSLA's lead is ginormous, and possibly insurmountable and b) TSLA cars are effectively computers on wheels. I have no idea what the share price will be in the next day/week/month, but I expect to continue to own shares and would likely buy more if there is a material (10% or so) selloff.

I haven't mentioned Nintendo ("NTDOY"), but it has been a moderate holding in most portfolios for most of this year, and shares have gained about 35% year-to-date. NTDOY has one of the top selling games in Animal Crossing, and it's new Switch console has been selling like wildfire. The uber-bullish scenario is that Switch becomes an ecosystem (or platform), which would trigger a re-rating upwards, but even without that NTDOY has successfully grown digital sales, now 56% of sales, (March 2020) from 38% in March 2019. Gaming has been a big winner during the pandemic, and most accounts own Activision ("ATVI") as well.

NTDOY's management is very conservative, and the company has $11.8bn cash and no debt. Even with this year's gains, NTDOY trades at a reasonable multiple, and doesn't seem to be on many investors' radar yet. I will be looking to add more NTDOY.

Online payments and digital banking is one area that has lots of running room, and up to this point the only name I've owned is PayPal (which I wrote about in the November, 2019 newsletter). I think the space is still evolving and I've added Square ("SQ") also. SQ has continually introduced new products aimed at both samll/mid sized businesses and also consumers, many of which are gaining traction. SQ was actively involved in distributing PPP loans (60% of recipients were new to SQ) and also recently purchased Spanish peer-to-peer payments app Verse, in what may be a bid to take it's lending platform global.

And on my radar

Fastly ("FSLY") has been on a tear, with revenue growth accelerating to 62% in Q2 from 38% growth in Q1. FSLY is a beneficiary of the aforementioned migration to an online world by providing "content delivery networks", essentially "traffic cops" for the internet. The best known CDN provider is Akamai, a company which is in several Peattie Capital portfolios. I'm also looking at 2U, Inc. ("TWOU") as a potential leader in disrupting higher education.

Stay tuned, these are both new for me, and I think each merits a closer look.

Please feel free to reach out with any questions comments and in the meantime stay safe and healthy!

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

May 29, 2020

A quick overview:

I said in my previous newsletter that markets would move further and faster than ever given all the algorithmic and machine-based trading, and boy, did I get that one right. Unfortunately, I also said that it was a "yellow flag" environment, and, while that was true for a short while, the bounce off the March low has been extraordinary. The takeaways for me are threefold: first is a reinforcement in my belief that owning, and staying with, the right companies provides the best chance for investment success; second is that trading/investing based on media or headlines is useless, and third is that volatility is the friend of the long term investor.

"It ain’t what you don't know that gets you into trouble. It’s what you know for sure that just ain't so."- Mark Twain

Literally every person I've spoken with about the markets has said something to the effect that "this rally makes no sense." While that may appear to be true today, I am reminded of Richard Russell's comment that "the markets make the news, not the other way around." Recently, John Normand of the JP Morgan cross-asset strategy team said "May should mark the end of the shortest but deepest recession in a century" (source Financial Times May 23-24). Perhaps the market has been forecasting that.

I don't know the ultimate outcome of the current situation. On one hand central banks around the world have purchased $6trn of assets to support markets while on the other hand there is the giant unknown of earnings and whether markets will give 2020 a “hall pass.”

My"north star" throughout has been that this crisis has accelerated many preexisting trends, and that that those trends will remain even after the economy opens up. I continue to favor companies/industries where rapid/monumental change is happening.

Performance is pretty good, hard to match the past few years