Blue Hen Investment Club · 2017-12-23 · Labor Force The unemployment rate has improved...
Transcript of Blue Hen Investment Club · 2017-12-23 · Labor Force The unemployment rate has improved...
LaborForce
Theunemploymentratehasimproveddrasticallyoverthelastfewyears,currentlysittingwellbelowits2yearaverageof5.4%,andinlinewithits1yaverageof4.9%.Medianweeklyearningsincreased2.9%overthelastyear,andsalariesareup2.5%overtheyear.Atfacevalue,thisdatasupportstheideathattheAmericaneconomyisslowly improving,andthatQEmayhavepaidoff.ThemajorhindrancetoacurrentratehikestemsfromstagnantinflationwhichhasyettoreachtheFed’s2%annualtargetrate.
InterestRates
MarketCommentary
4.8
4.85
4.9
4.95
5
5.05
62.262.362.462.562.662.762.862.963
63.1
LaborPartcipation UnemploymentRate
0
0.5
1
1.5
2
2.5
0
0.1
0.2
0.3
0.4
0.5
0.6
EffectiveFederalFundsRate FederalFunds(UpperTarget) US10y
TheUS10yisdownsignificantlyfromits2yaverageof2.1and1yaverageof1.8,whichmaybeevidentofalongerterminflowtogovernmentbondsresultingfromtheFed’slackofactionregardingmonetarynormalization.However, the runup fromMay toSeptember could signal investor’sunwillingness toinvestinthelongendofthecurve.Thisunwillingnessismostlikelydrivenbyconcernregardingshorttermuncertainty.CorporateDebtMarkets
Thechartaboveisevidentofayield-starvedinvestmentclimate.TheInvestmentGradeindexappreciatedonly.7%overtheperiod,whiletheHighYieldindexsawahealthy5.6%increaseinthesameamountoftime.Rightnow,thesekindsofbondsareextremelyattractiveto investors,giventheirrelativelyhighyields(IG–3.4%;HY–6.4%).
OilMarket
145
146
147
148
149
1060
1080
1100
1120
1140
1160
1180
HighYieldIndex InvestmentGradeIndex
42
44
46
48
50
52
54
56
WTISpot
Oilpriceshavestabilized.Therecoveryhaslargelybeendrivenbypoliticalpricecontrol,stagnantgrowthinthedollar,andsupplyreduction.Itisimportanttonoteoil’srelationshiptoinflation.Movingforward,whatever happens to the price of oil, inflation could be at risk of helping or hurting the currentmacroeconomiccondition.Withstagnantoilprices,inflationwillnotapproachaninflectionpoint.Ifoilmoveshigherthrough2016into2017,inflationmayincrease,supportingtheratehikeargument.USDollarIndex
WhileQ3markedarelativelystableperiodfortheUSD,theSeptember2017USDFuturesIndeximpliesmonetarynormalizationtorampupinthecomingyears.ThetailendofthequartersawtheUSDspotgrowover3%intheSeptember.Analystscontinuetonotethatarisingdollarmaydepresscorporateearnings,especiallyifglobalmonetarypoliciesstaysdovish.ThisdivergentmonetarypolicymayforcetheFedtostayaccommodative.EquityMarkets
92
93
94
95
96
97
98
USDSpot
1919.219.419.619.82020.220.420.620.8
2020204020602080210021202140216021802200
ClosingPrice PriceEarningsRatio
Q3markedaflatperiodforU.Sequityindices.TheS&P500currentlytradesatabout20xearning,aboutanaveragevaluationcomparedtoa19.8xtrailing5-yearmultiple.Thisslightovervaluationmayjustbeamanifestationofthenewlong-termlowrateenvironment.ThirdQuarterCorporateEarnings
Onaweighted-averageEPSbasis,earningsinthepastthreequartershavebeenpositivelyaffectedbyamassiveexpansioninHealthcare’sbottomline,growingat7.5%YTD.Conversely,theseearningshavebeenhurtbywaningTelecomearnings,marginallydecliningConsumerDiscretionaryearnings,andthemassivedropinEnergysectorearningsofmorethan9%YTD.
BHICvs.S&P500SectorReturn
ThirdQuarter–
PortfolioPerformanceandCommentary
-20246
ComparisontoSPXover3Q2016
BHICTotalReturn SP500TotalReturn
222324252627282930
Q22015 Q32015 Q42015 Q12016 Q22016 Q32016
WeightedEstimatedEarnings TrailingWeightedEPS
TheBHICportfoliocloselytracedtheS&P500overQ3.Movingforward,ournewly-adoptedbenchmarkapproach should change this lack of deviation. More emphasis on security analysis and subsectorallocationscombinedwithacommitmenttoreducethenumberofholdingsshouldfurtherincreaseourtrackingerror.Thesetwofactorscombinedshouldreallocateportfoliorisk,andleadtobetterreturns.
YeartoDate–
The BHIC portfolio underperformed the benchmark YTD 2016, due primarily to underperformanceamongsectorsincludingEnergy,Materials,andIndustrials.Thebenchmarkhasreturned~8%,whiletheportfolioreturned~4%.SectorContributiontoTotalReturnThirdQuarter–
ComparedtotheS&P500,theBHICportfolio’sFinancials,RealEstate,Telecomm,andUtilitiessectorsoutperformed.Mostoftheoutperformanceinthesesectorswasattributabletolossavoidance.BystayingoutofTelecomm,our IT/Telecommsectorwasabletoadd.2%totheportfolio.Theportfoliodidnot
-15
-10
-5
0
5
10
12/31/15 1/31/16 2/29/16 3/31/16 4/30/16 5/31/16 6/30/16 7/31/16 8/31/16 9/30/16
ComparisontoSPXYTD2016
BHICTotalReturn SP500TotalReturn
-10.00-5.00
--5.0010.0015.00
BHICvs.SPXSectorContributions
BHICTotalReturn SP500TotalReturn
drasticallyoutpacetheindexbecauseoflackofinvestmentinMaterialsandpoorselectioneffectfromwithin Consumer Staples, Discretionary, Healthcare, and Energy. The portfolio saw large single-stockappreciationfromnamesincludingHealthcareTrustofAmerica,BankofAmerica,Intel,Cisco,andApple.
BHICvs.S&P500YTDSectorPerformance
YeartoDate–
TheselectioneffectalsohurtusonaYTDbasis.PositionsinEnergy,ConsumerDiscretionary,Healthcare,Industrials,MaterialsandTelecommwerethestandoutmisallocations.
ConsumerDiscretionary
-10.00-5.00
--5.0010.0015.0020.00
BHICvsSPXSectorContributionsYTD2016
BHICTotalReturn SP500TotalReturn
SectorRecap&InvestmentHighlights
90
95
100
105
110
115
120
6/30/16 7/30/16 8/29/16 9/28/16
S5CONDIndex SPXIndex GNTXUSEquity
SectorPerformanceOverview
Consumer Discretionary marginally trailed the S&P over Q3. The sector started Q3 with strongperformance following beneficial macroeconomic data including surprisingly strong jobs. The sharppullback aroundSeptember9thwasdue to adecrease inpayrolls, global concerns around currencydevaluation,andfearstemmingfromwaninggrowthinAsia.Therecentuptickinglobalsystematicriskmaybeenoughforinvestorstopulloutofthishistoricallymoreriskysector.
SectorHighlight
Afteraslowstarttothequarter,Gentexwentontoconsiderablyoutperform.TheimprovementwasadirectresultofafavorableQ3earningsreportreleasedonJuly22.Gentexannounceda12%quarter-over-quarter increase in sales and a 1% boost in gross profits. The rise in revenue stemmed fromincreasedauto-dimmingmirrorshipmentsandanincreaseinlightvehicleautoproduction.Thesegainswere further sustained by rebounding car sales in Europe. The fund capitalized on Gentex’s recentoutperformance,andliquidatedthepositionforanoverallreturnof23%.
Energy&Utilities
SectorPerformanceOverview
TheEnergySectorperformedpoorly inQ3.Froma subsectorperspective,drilling&explorationandintegratedcompaniesobservedabriefrebound,giventhepositiveOPECdecisioninearlyOctober.Theagreementwastopreliminarilyhaltproductionanddecreasethedailyoutputbyslightlyoveramillionbarrelsperdayfromtrendingaverages.WTIpricesrealizedamodestgainasthenewsbecamepublic,butoverallthepriceofabarrelofcrudehasremainedunderthe$50threshold.
SectorHighlight
HollyFrontier isarelativelysmallplayercomparedto itsGulfCoastpeers,however, itsrefineriesarecompetitively positioned.HollyFrontier is the largest independent refiner that has all of its facilitieslocatedintheRockiesandSouthwestregion.Asaresult,ithasbenefitedfromthedifferenceinpricebetweenWestTexasIntermediateandotherhigh-qualitywaterbornecrudesuchasBrentoverthethirdquarter.WithaccesstoabundantsuppliesofWTI,HollyFrontierrefineriesleveragedthemarginthatthe
9095
100105110115120
6/30/2016 7/30/2016 8/29/2016 9/28/2016
S5ENRSIndex SPXIndex HFCUSEquity
spreadoffered.Howeverasthequarterconcluded,elevatedcrudeinventoriesandoversupplyweighedinonthecompany’svaluationasinvestorssoldshares.
Financials&RealEstate
SectorPerformanceOverviewFollowingBrexit,theFinancialssectorregainedmostof itspreviouslyexperiencedlosses. ValuationsweresupportedbytheFed’scontinuedaccommodativepolicyaswellaspositivestresstestresultswhichsawmostbankspasstheFed’stest.WhilecommercialbankingispoisedtobenefitfromaFedratehike,thenewlydivestedREITsectorwouldbeimpactednegatively.Movingforward,theFOMCmeetinginDecemberandanymajoreventsinvolvingtheUK’ssecessionfromtheEUwillhelpdefineadirectionforfinancialcompaniesinthenearfuture.
SectorHighlight
EvercorePartnersmanagedtooutperformtheS&P500,aswellasalltheotherfinancialsubsectorsthisquarter.Thestocksawa17%increaseinprice,comparedto3%fortheS&P500and4%fortheFinancialsSectorIndex.Themainreasonforitsoutperformancewasduetothecompany’sQ2Earningsreport,inwhichthecompanymanagedtosurpassearningsbyover10%aswellasrevenuebycloseto6%duetoincreaseddealvolumeandnormalizationafterBrexit.
9095
100105110115120125
EVRUSEquity SPXIndex S5FINLIndex
Industrials&Materials
SectorPerformanceOverview
TheIndustrialssectorindextrackedtheS&Pfortheperiod,endinginlinewiththebenchmark.Frommid-August onwards, the sector traded down on interest-rate-increase speculation. New York FedPresidentWilliamDudleystokedthisfearbysuggestingborrowingcostscouldbeboostedassoonasOctober. The strong U.S. dollar continues to be a major headwind for many industrial companies.Overseas demand for US manufactured machinery continues to feel pressure with lagging worldeconomicgrowthforecasts.Asianeconomichealthcomesasaprimaryconcernformachinery,astheyrepresentalargepartofthemarket.
SectorHighlight
Acuityoutperformed the sector, asmanagement continued to invest inareaswith significant futuregrowthpotential.Byexpandingtheirdigitallightingandbuildingmanagementsolutionsportfolio,theyarebuildingabackboneforadditionalInternetofThings(IoT)applications.Digitallightingisexpectedtoshowstronggrowthasconnected lighting isbecomingacommon industrytheme.DuringtheperiodAquity acquired the IoT application platform, Dglogik, further illustrating this grow strategy. Aquitymissedearningsduringtheperiod,resultingfromaone-timecostrelatedtostreamliningtheirsupplychain,andclosingmanufacturinglocationaheadofschedule.Thisactionresultedinshort-termlaborissues,causingalossofnetsalesequalto$25M.Netsalesforthequarterwerearecord$926M(+21.9%Y/Y),missingby$22.7M.
90
95
100
105
110
115
7/1/2016 7/15/2016 7/29/2016 8/12/2016 8/26/2016 9/9/2016 9/23/2016
S5INDUIndex SPXIndex AYIUSEquity
Healthcare
SectorPerformanceOverviewBoththepresidentialelectionandcongressionalelectionswillhavesignificantimplicationsonthefateofTheAffordableCareAct,aswellas taxes levieduponthepharmaceutical space.ShouldSecretaryClintonbe elected, biotechnology companies such asRoche,Amgen, andAbbViemay suffermarginpressuresfromtheFDA’sbiosimiliarpathway.Medicaldevicesmanufacturerscontinuetorebelagainstthe2.3%excisetaximposedviaObamacare.TheHousepassedlegislationin2015torepealObamacare;thebillcurrentlysitsintheSenate.DeviceproviderssuchasMedtronic,Johnson&Johnson,andThermoFisher Scientificwould seemarginboosts across theboard should the legislationpass.Obamacare’staxationonnamebranddrugswilltop$4.1billionby2018,affectingpharmaceuticalcompanieswithexposuresuchasGilead,Amgen,andPfizer.Congresspassedbudgetreconciliationlegislationtorepealmanyofthetaxmeasuresagainstthehealthcareindustry,butthebillwasvetoedbyPresidentObama.ShouldtheNovemberelectionsplaceRepublicansinboththepresidencyandCongress,suchlegislationcouldbeenactedby2017.SectorHighlight
Icon PLC significantly outperformed the S&P500 Index despite the bearish overall outlook on thehealthcaresector.IconcontinuestoseerobusttoplinegrowthduetorenewedcontractswithPfizer.Thefirm’scompetitiveadvantagecontinuestobeafunctionof its fullscopeofserviceofferingsandinternationalreach.Inaddition,thecompany’spartnershipwithIBMWatsonlendsthemuniqueaccesstohighpowerdataprocessingandanalytics, agrowingnecessity in the clinical trialprocess.Capitaldeploymenthascentralizedaroundbolt-on,M&A,andsharerepurchases.Q3earningsestimatestargetrevenueof$1.6millionwithmodestmargingrowth.
90
95
100
105
110
115
7/5/2016 8/4/2016 9/3/2016
S5HLTHIndex SPXIndex ICLRUSEquity
InformationTechnology&Telecommunications
SectorPerformanceOverview
TheITindexsignificantlyoutperformedtheS&Pfortheperiod.TheinitialdropinvaluationswastheculminationofglobalconcernscombinedwithweakperformanceofAsianmarkets.HoweverfollowingtheSeptembercorrection,techwasabletorally,ledmostlybyApple’sreleaseoftheiPhone7.
SectorHighlight
ApplesignificantlyoutperformedthesectorduringQ3,mostlyduetothereleaseoftheiPhone7andSamsung’sGalaxyissues.Samsungwasforcedtodroptheproductentirelyafterthefirstroundofrecalls,becausethephonescontinuedtoexplode.TherearenoofficialnumbersforiPhone7sales,butsuppliershavehintedthattheycouldbeintherangeof70Mto75Minthefirstmonthand100Mbyyearend.
ConsumerStaples
95
100
105
110
115
120
125
AAPLUSEquity SPXIndex S5INFTIndex
90
95
100
105
7/1/2016 7/31/2016 8/30/2016 9/29/2016Walmart XLP SPX
SectorPerformanceOverviewAfterslightlyoutperformingtheS&PinQ2,theConsumerStaplesIndexwasbeatenbytheS&P500inQ3.Thetwoindexesbegantodivergeinthesecondweekofthequarter,andXLPneverwasabletoclosethegapbetweenthetwofortheremainderofthequarter. Both indexesremainedflatduringAugust.ThisuneventfulquartercouldbeduetothedisappointingjobsreportonSeptember2nd,aswellasthelackofstrongdirectionregardingtheUSeconomy.
SectorHighlight
AlthoughWalmartInc.(WMT)underperformedtheS&PinQ3, itslightlyoutperformedthesector. Inearly July, the stockdroppedas employee’sprotestedat someof their stores inChinaandanalystsbecameskepticalofWalmart’snewpaymentapp.InlateAugust,thestockexperiencedvolatilityamidnewsoftheacquisitionofJet.com,aswellasWarrenBuffet’sdecisiontosellhispositioninWMT.
WeexpectWalmarttospendmuchofthenextfiscalyearworkingonthequalityoftheirstoresratherthanincreasingvolume.ThisstrategymayhelpboosttheirSameStoreSalesfiguresinQ4.WhiletheirrevenueoutlookfortherestofQ4andmostof2017isrelativelyflat,theymayhavealowerprofitmarginduetolastyear’semployeewageincreases.