June 30, 2023
AI is for real…..and The Electrification of Everything .
What’s noteworthy to me about 2023 so far is how narrow the market is. Seven companies in the S&P 500 (Apple, Tesla, Alphabet, Nvidia, Meta, Microsoft, Amazon) collectively have gained 53% and the remaining 493 have gained 3% (source: FactSet, Goldman Sachs Global Investment Research). Overall, the S&P 500 is +15%. Lately, more names have begun participating, but broadly speaking this kind of concentration isn’t a healthy sign.
Many people think AI’s applications are limitless and are calling this period the advent of the next economic revolution, fundamentally changing the way we live our lives. According to the June 6 Financial Times (“AI buzz does not foretell another dotcom bubble” - John Plender) the “public facing version of ChatGPT reached 100mm users in just two months”, and “the data analytics firm GlobalData estimates the global AI market will be worth $383bn in 2030, a 21% compound annual growth rate over 2022.”
I also want to mention that it took me one minute to prompt ChatGPT to write a short summary of the first half of the year, and in less time than that the attached summary appeared. It is an amazing tool (!) and I agree that it is far more than a passing fad. Companies from numerous industries are already finding ways to use it to make their operations more efficient and profitable.
In addition to AI, the electrification of everything continues and Tesla’s dominant position in autos (and data collection) is only getting stronger after several competitors recently announced they would adapt Tesla’s charging station. In addition, Elon Musk is exploring ways to expand in India. Several analysts have downgraded TSLA from buy to neutral, but I think it remains a solid holding and will continue to reward patient investors.
These two areas present a wonderful investing opportunity and so far, the mega cap tech names which have long been Peattie Capital holdings have been beneficiaries. I expect to continue holding those names.
The Fed remains active
Chairman Powell recently testified that he expected two more rate hikes this year and I believe we are very near the end of this rate hike cycle. The Fed Funds rate is now above the inflation rate and many components of the inflation calculation are moving in the right direction. One exception is rent, which remains somewhat problematic. The CPI dropped to 4.5% in May, down from 5.0% in March and April, and down from 9.0% at its peak a year ago. M-2 money supply figures have been contracting as well, down for the fourth consecutive month in May, and this will also help.
On the other hand, China hasn’t grown as expected and has been cutting rates. Peattie Capital owns two Chinese companies in portfolios, Alibaba (“BABA”) and BYD (“BYD”). Most street price targets for BABA are in the $130 range, well above the current $84. It’s surprising to me that despite the low forward P/E ratio of approximately 9.5x, the announcement to break itself up, and the discount to the sum of its parts, BABA remains stuck in the $80-$85 range. This one may become a source of funds.
BYD is this generation’s Volkswagen, with a low-cost, high-volume operating model. BYD is expanding geographically and the only negative thing I can say about it is that Warren Buffett has been selling some of his position. I think it is well-positioned for more growth and will be the dominant EV company along with Tesla.
Some other international investments have done well, such as Mexico which has gained 25% this year, and Japan. Several portfolios own the ETFs for these countries also.
A couple other positions
The disaster that is Texas Pacific Holdings (“TPL”) continues, and I am ruing not selling all the shares. TPL has the single worst corporate management I’ve ever seen, with its new Board members and CEO attempting to re-invent a company that has been successfully operating and generating significant wealth for shareholders since 1888. Management spent $16mm in Q1 on legal fees suing its largest shareholder…. who is also on the Board. As Warren Buffett has said (paraphrasing) “it’s best to buy a company that even an idiot could run, because one day an idiot will.” The lawsuit is winding its way through the court, and there could be news any day. If current management prevails, I will sell the remaining shares in several portfolios but if they lose and have the good sense to resign I expect to buy more shares.
Enphase (“ENPH”) is a new (and very small) position for a few portfolios. I love seeing insiders open their checkbook to buy shares, and when ENPH sold off after its Q1 earnings report the CFO bought another 3,500 shares at about $156 bringing her total directly owned shares to about 100,000. I will be following this more closely.
A new position in several portfolios is Copart (“CPRT”), which operates in the automobile salvage and resale market. It was founded in 1982 with a single yard in California, and it now operates 200 locations and sells over two million vehicles every year, mostly through online auctions. I particularly like the “network effect” it has created by attracting both buyers and sellers and the fact that its extensive real estate holdings serve as a protective moat from competition. I hope to own CPRT for many years.
Conclusion: it’s still a favorable calendar
Earnings are always critical but in pre-election years when the market has been ahead through June it has gone on to close the year even higher 12 of 12 times. While there is always the possibility of an exogenous event, this precedent and the (nearing) end of rate hikes, suggests to me the odds favor a positive second half of the year. I wouldn’t know how to quantify this, but I suspect many institutional investors are underinvested, and will be compelled to chase this market, providing more support to it.
Regardless, I am pleased with the developments at PCM portfolio companies and look forward to their continued success.
Please feel free to contact me if you have questions or comments and best wishes to all for a safe and happy Fourth of July!