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Dear Friends of Peattie Capital,

To date, it’s been a wonderful year, and I’m particularly happy that my new strategy with select IRA accounts has been so successful. Most have gained about 50% for the year through September. (Note: past performance is not an indicator of future returns).

The markets seem to be obsessed with macro issues, but I am increasingly focusing on individual stock selection and have found that this is a far better way to create wealth in equities. That is not to say that even for the best companies there won’t be down periods, as many great companies have corrected 40% or more as they grow. However, I believe that staying with the best companies over time will produce the best results.

A recent example is TransMedics Group (“TMDX”), which dropped 50% about a year ago and then dropped another 20% starting in August. Meanwhile, shares have tripled, going from ~$50 to ~$145 as I write this.

As for the current obsessions, I don’t know who the next President will be, or what will happen in Ukraine or the Middle East, or how long China will continue its less restrictive policies. I am curious about the makeup of Congress and am rooting for a split which would make changes more difficult.

I do know that the Federal Reserve has begun an easing cycle, which tends to be good for business overall and also supports multiple expansion for stocks. I think the economy is holding up well, and the lower rates might provide the impetus for companies to add more employees or undertake a new project.

October tends to be a weak month for equities, but after the election, things tend to finish strongly. I have no idea if that will happen this year, but it’s a helpful reference and I tend to defer to historical patterns.

Please feel free to comment or let me know if you have any questions.
Best regards,
Bill

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July 22, 2024

It’s been an outstanding run at Peattie Capital the past six months or so. After a difficult 2022, when the Federal Reserve unwound years of easing, many accounts have bounced back and recently reached all-time highs.

My decision to carve out more aggressive accounts and alter the approach for them has paid nice dividends as many of these have had a very strong 2024, and I am hopeful that will continue. These are exclusively tax deferred accounts (IRAs) and in them I hold bigger positions in my highest conviction names and am willing to trade around a core position, trimming on strong days and adding on weakness. Names like Shift4Payments (“FOUR”), Nvidia (“NVDA”) and TransMedics (“TMDX”) are examples of current holdings. So far I am going to say this has been a successful undertaking.

Just to reiterate, for most PCM clients it’s a more long-term, buy and hold approach and I have owned MicroSoft (“MSFT”) Alphabet (“GOOG”) and Amazon (“AMZN”) for many years. I have no plans to sell them based on what I know today.

For more conservative accounts I continue to own a few consumer staples names like PepsiCo (“PEP”) and also some companies that have a niche product or are dominant in an oligopoly. Examples are Heico (“HEI”), Copart (“CPRT”) and Idexx Labs (“IDXX”). For the past year I have also been buying (and rolling) three-month Treasury bills in these accounts.

What’s Next?

After such a strong first half, markets tend to do well the rest of the year. According to Carson Investment Research, when the S&P is up double digits through Q2, the rest of the year is up on average 7.7% (median 9.8%) and is higher 83% of the time for an average annual return of 25.1%.

Not that these one-off statistical data points are always correct, but frequently there are patterns and knowing about them can be helpful.

There tends to be some choppiness from mid/late July into October and 2023 was a good example of that, as the Fed had raised rates 500 basis points and there was no talk of cuts at all. We weren’t sure if they were even finished! The Nasdaq (“QQQ”) dropped about 12% and the S&P 500 (“SPY”) also dropped 11% from the mid-July peak to the October low.

In contrast, this year the narrative is that cuts are on the table, and the market expects one in September, provided the August CPI report, on the 14th, doesn’t come in too hot. No one enjoys these wiggles and bumps, but my opinion is that the recent volatility is normal and healthy.

After the results of the elections are clear, the market tends to do well.

Earnings, earnings

More than anything I think earnings are the ultimate driver of stock prices, especially long term, and I am optimistic about earnings for Peattie Capital companies, many of which I have owned for years.

Please let me know if you have questions or comments.

Best regards,

Bill

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March 27, 2024

2024 off to a good start

The S&P 500 has gained 10% so far in Q1 and most Peattie Capital portfolios have performed very well, despite two widely held names struggling (Tesla -30% and Apple -10%). Large cap tech names continue to be the driving force, but broadly speaking, market participation is growing. Defensive industries like health care, consumer staples and utilities are underperforming, which I take as a good sign.

It was very surprising to me that Fed Chair Powell struck such a dovish tone in his March 20 press conference as inflation data has been running a little hotter lately. Despite a bump in the 2024 projected rate to 2.6% from 2.4%, Powell reiterated that the FOMC was on track for two or even three cuts this year. Not surprisingly the market rallied 1% the afternoon of Powell’s comments.

Earnings for the most part have been good, and the AI trade has begun to spread out from just semiconductors to a variety of other industries who will be beneficiaries. March has been another good month for the indices and election years tends to do well, especially if prior years have been strong, which is clearly the case in 2024. Here are a few tables that illustrate the story:

I have said several times that this period reminds me of the end of the aggressive rate hike cycle of 1994-1995, when the internet was just taking hold, and the late 90’s was an exceptionally strong period for equities.

S&P 500 A little Stretched

All that said, here are a few cautious data points about the S&P 500 from the March 15 issue of Grant’s Interest Rate Observer article “Anniversary Value Testament.”

“In the decade ended 2021, the blue-chip index posted an average annual 3.4% increase in sales…and after-tax net margins of constituent companies expanded to 13.3% from 9.2% while the multiple climbed to 22.9x from 13.3x.

Though margins have contracted a bit, to 11.4% of sales last year from 13.3% in 2021, they remain distended. They’re outsized compared with even the ones recorded at history’s major market tops. Thus, 8.9% in 1929, 7.4% at the peak of the dot-com boom in 2000 and 9.4% on the eve of the housing bust in 2007. If margins fell to 8% by 2033 as the S&P multiple slid to 15 from 22.3 at year-end last year (15 being its average over the last century or so), stocks would be flat for the next decade, even with dividend income included.”

My takeaway remains that individual company and industry selection offers a better chance for investment success than the indexes do, especially from today’s levels.

A Slight Change in Tactics at Peattie Capital

Most Peattie Capital clients have both taxable and IRA accounts, which is helpful for a couple reasons: First, it allows me to see the overall picture and position assets accordingly and second it allows me to take profits without triggering capital gains taxes. Recently I have been a little more proactive about taking profits in the nontaxable account.

A good example of this is TSLA which is, and will remain, a long-term holding in taxable accounts. Even with the current >50% drop from the all-time high, many clients have large unrealized gains in the name, and I am optimistic that TSLA will be a force in several new and cutting-edge industries going forward. However, there are a few other emerging companies that I would like to own, and so in IRA accounts I have sold the name and redeployed funds into them. There are other examples as well, such as AMD, and I’ve even trimmed bits of Apple (“AAPL”) in IRAs.

A few core holdings

In my last newsletter I mentioned Copart (“CPRT”) and MercadoLibre (“MELI”) as new positions and they both recently reported very strong numbers. CPRT is the dominant competitor in a growing duopoly and if shares were to correct at all, I would buy more, even though CPRT is already a very large position in most accounts.

MELI has consistently reported strong numbers but at roughly 50x earnings it is expensive. By itself, that’s not a problem, but revenue growth is expected to slow from 37% in 2023 to the low/mid 20% range and earnings are expected to grow about 44%. Shares have dropped 16% over the past month and I have begun to add shares selectively as I believe MELI has a long runway and that the company will continue to grow steadily, albeit not at the rates of growth it had in the past.

AAPL now represents 5.7% of the S&P 500, the lowest since June, 2023 and down from 7.7% in mid-2023. AAPL has a high earnings multiple with low growth and the price has steadily been contracting. I believe APPL is a fabulous company and I expect to keep holding it in long term portfolios.

And a few newer names

Crowdstrike (“CRWD”) appears to be the leading security company and the shares have gained 30% this year and 150% over the past 12 months. On the recent earnings call CRWD guided to (roughly) $3.50 in earnings this year and at nearly 100x that seemed a little rich to me. Granted, they appear to be the “go to” in security and on the earnings call they ripped Palo Alto Networks (“PANW”), calling them (paraphrasing) a mishmash of one-offs. CRWD is another example of a wonderful company that I expect to own for a long time in taxable accounts but in IRA accounts I took some profits.

Transmedics (“TMDX”) has beaten estimates several quarters now (they beat their original ’23 guidance by 70%) and also surprised by being GAAP profitable-I suppose that means even Warren Buffett could buy this one. TMDX is adding planes and is working to become the “go-to” in organ care and delivery. Shares trade at about 6x revenue estimates and earnings are expected to grow 40% this year.

Fintech isn’t my favorite area but Shift4 Payments (“FOUR”) is growing 40-50% and trades at 12x EBITDA. PayPal (“PYPL”) is 8x ’24 EBITDA with little growth. I don’t know Seaport Research but in a recent research note they stated that Square (“SQ”) could buy FOUR at a 40% premium to the current price and it would still be accretive for them. Subsequently FOUR’s CEO said that there had been discussions but that none of the potential offers for the company were sufficient. I am happy to own FOUR as I think it can double in the next year or so.

The Election

I thought the attached summary was helpful….not my prediction!

Please let me know if you have any questions or comments,

Best regards,

Bill

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