June 7, 2021
2021 continues to be a challenging year at Peattie Capital, as innovation/disruptive names are (mostly) out of favor. For the year through May, most Peattie Capital accounts gained low/mid-single digits compared to a roughly 13% total return for the S&P 500. Conservatively managed accounts are roughly in line with the S&P.
Account performance varies based on individual client goals and constraints and past performance is not a guarantee of future returns.
Rotation, rotation
The primary beneficiaries of the rotation away from growth are cyclicals and small caps which historically have outperformed on a relative basis when the US economy is recovering. Rather than chase the current flavor of the day, I prefer to hold the names I own for several reasons.
First, I believe longer term they will continue to grow, and grow profitably. Second, consistently timing economic turns correctly so as to be in the favored asset class requires correctly predicting economic cycles, which is very difficult to do consistently. Third, selling big winners generates taxes, and fourth, selling them also generates the question of when to get back in.
For clients who are looking for a more conservative approach, or have some other goal (income e.g.) I am completely flexible and happy to construct portfolios that address those goals….and there are a number of those within Peattie Capital. Being able to address specific client goals is one of the reasons Peattie Capital manages separate accounts only, and is not a fund.
However, left to my own (as in “just do your thing, Bill”) I believe in the long term growth story of change/growth/innovation/disruption and expect to favor that going forward.
The inflation debate is still front and center
Of all the macro issues being discussed, I think the inflation question is the most important because inflation will drive interest rates and interest rates will directly impact stock prices. Most market participants and observers I’ve read or spoken with feel strongly that it’s a question of “when” not “if” inflation kicks in. I maintain that a variety of transitory events are happening simultaneously and therefore it’s still debatable if the inflation genie is out of the bottle.
Fed Chairman Powell has repeatedly stated his belief that current price rises are transitory, and recently several other FOMC members have also reiterated that position. Certainly the bond market is warming up to that idea, as yields have stopped rising, and haven’t gone above their previous high from late March. Lumber, corn, copper and US Steel’s share price all peaked in early May, as did the Baltic Dry index. Oil prices dropped to the $20s last year so the current high $60s price looks inflationary, but that’s only in comparison to last year.
One of my favorite market truisms as it relates to commodities is that “price cures price.” That is, a rise in oil begets more production, which eventually leads to an oversupply, which eventually leads to a price crash. Oil is on a long-term downward trend in my opinion, with lower peaks and lower lows over the past 15 (ish) years. Except for Texas Pacific Land Trust (“TPL”) I have avoided oil/energy related companies.
And not just commodities
As for other inflation-related items such as housing and materials, among others, I think the economy is opening up and there are supply constraints while demand is growing. It seems to me that the Federal Reserve has done a good job explaining that, and in this case I am with them.
Jason M. Thomas (head of global research at Carlyle Group) wrote an op-ed piece which appeared in the WSJ Thursday, May 27 titled “Reopening is Inflation’s Cure, not Cause” citing the 38% growth in motorcycle sales as an example of the current supply/demand mismatch.
“If 38% were to represent the new trend rate of growth in demand for motorcycles, inflation would be a genuine concern….But if, as is far more likely, this growth rate represents a one-time boom occurring in very unusual circumstances under which consumers paid for goods to replace live events and travel, then motorcycle sales will likely moderate in future quarters, production will return to pre-pandemic levels, and price pressures should dissipate.”
One of my favorite economists is David Rosenberg, who writes daily about global economic data, and he stated on May 18 (“Breakfast with Dave”)
We are seeing a price-level adjustment coming out of the pandemic and the price data can easily be explained by an economy re-opening in the face of several supply constraints….here we are in May, with all the inflation hysteria, and the Cleveland Fed’s 5-year inflation expectation measure was 1.48%, the same as in April, and the 10-year metric actually had the temerity to dip to 1.57% from 1.58%.....”
At this stage no one knows how the inflation story will play out but I also believe that technology, overall, is deflationary (as is debt) and there is innovation happening everywhere. It’s noteworthy to me that 30-yr. mortgage rates have hovered around 3% which doesn’t look terribly inflationary to me.
One other item worth mentioning is the potential for tapering by the Federal Reserve, which could trigger a correction….who knows when that might happen or what the market’s response will be.
The opportunities are still in technology
More importantly to my way of thinking is that the massive trends in all things digital are continuing unabated, and even after the re-opening these trends will not reverse.
A good example of this is Fintech, where Square (“SQ”) continues to evolve and provide more services and opportunities for customers. Most recently SQ announced that it will provide lending services. PayPal (“PYPL”) is another favorite here, and also is creating new digitally oriented services and operations. I might mention that Peattie Capital only owns one traditional bank, JP Morgan (“JPM”), and that in only a few conservative/blue chip portfolios.
The mega-tech names like Alphabet (“GOOG”), Microsoft (“MSFT”) and Amazon (“AMZN”) are still growing nicely and will be important names to own going forward, and I was delighted to read in this weekend’s FT that Julian Robertson, widely considered one of the greatest hedge fund managers ever, described Big Tech by saying:
“I think they are good value. I don’t think the valuations are….much higher than they’ve been all along.”
Pretty much every account owns GOOG and MSFT, and most own some AMZN. It’s nice that such a highly regarded investor likes these names, and I have no intention of selling any of them based on what I know today. However, the best performing names over the next few years will be those who are still relatively small and can accelerate growth from current levels.
I expect there will be continued volatility in stock prices, especially if rates go higher, and I believe the key to longer term investment success will be finding and owning companies that are well positioned to compete in the new “digital” world, despite the ups and downs that will accompany those names.
A Few Examples: Upstart (“UPST”) and Globant (“GLOB”)
Generally, I don’t like to own recent IPOs, but Upstart (“UPST”) is an Artificial Intelligence (“AI”) platform which uses some 1600 metrics to help banks identify borrowers who may not appear attractive based on FICO scores but who actually are creditworthy. Lending is soft right now, and UPST’s platform can apply to all kinds of loan candidates and types.
The company states that 80% of Americans have never defaulted on a loan yet only about 48% have access to prime credit. CEO Dave Girouard said “There’s broad consensus that the credit economy is highly inefficient, if not broken.”
97% of UPST’s revenues are from fees from banks and the company benefits from loans without taking on credit risk. Revenues grew 42% in 2020 and accelerated to 90% growth in Q1 2021. In 2020 UPST had $1mm in net income, and in Q1 UPST reported $10.1 net income on a GAAP basis.
I believe UPST will be volatile, but is in the right place at the right time and that its $14 billion market cap will be much higher in a few years.
GLOB is a “digitally native” IT company with an $8bn valuation. Much like UPST, I think near-term there will be volatility, but over the next several years it will be a much bigger company. GLOB grew revenues 41% in Q1, the highest year-over-year growth in the company’s history, and guided to 54% growth in Q2. The company is profitable and relatively unknown as there is very little Wall St. coverage. GLOB increased the number of customers paying over $1mm annually from 112 in Q1 2020 to 139 in Q1 2021.
GLOB and UPST are good examples of the kinds of companies that I believe will deliver strong returns over time. That said, they are not for everyone, and I conclude by re-iterating that Peattie Capital Management manages separate accounts only, and has any number of accounts whose goals and constraints vary.
Please feel free to contact me with any questions or comments.
