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2015 ISSUES



December 2, 2015

 

Range of Returns
November
YTD
All PCM Accounts
(2.0%) - 0.4%
(5.1) - 3.5%
S&P 500
0.1%
1.0%

Slightly down for most Peattie Capital portfolios

Peattie Capital has had an abundance of exceptionally strong performers this year, such as EPAM Systems ("EPAM") which has gained 65%, Sabre Corporation ("SABR") which has gained 45% and Royal Caribbean ("RCL") which has gained 13%. EPAM has never been a Peattie Capital recommended stock, but the other two have been and subsequently have been big winners.

Despite this, most Peattie Capital portfolios are down slightly in 2015, as one (or two) big positions has faltered badly and dragged down overall performance. For example, KVH Industries ("KVHI"), which is both a micro-cap and has significant overseas operations, started the year ~$12, peaked in the spring near $16, and closed November at $9.86. This 38% drop has had a major impact on performance, but at today's price I consider KVHI an outstanding opportunity, with the best risk/reward profile of all Peattie Capital positions. I am nibbling at more shares even though for some accounts KVHI represents over 10% of the portfolio.

Two other large positions that have corrected and caused performance to suffer are Sealed Air ("SEE") and Macquiarie Infrastructure Trust ("MIC"), which have dropped 18% and 14% respectively from nearby highs. There are big unrealized gains in these two names and I'm not inclined to sell them at today's prices. Based on what I know today, I believe each is a good mid-long term opportunity.

Narrow market continues

The 2015 "bigger is better" theme continued in November. According to a recent Forbes article ("How a monster year for Amazon, Google and Facebook is carrying the stock market" - November 16), the return for the S&P 500 would be -2.2% absent those three names (as well as Microsoft and General Electric). Even with them, the return of the S&P 500 is 1%, excluding dividend reinvestment.

As John Authers said in this weekend's Financial Times ("Bear your Fangs or use Nifty footwork to shine in the US"), "to win you needed to fix on a few large stocks that looked overvalued and hold onto them....an almost impossible strategy to justify."

This "chase a few hot stocks" market has not been kind to many well known (and highly successful) investors: Warren Buffett's Berkshire Hathaway is down about 10%, Bill Ackman's Pershing Square is down about 17%, David Einhorn's Greenlight Reinsurance is down around 33%, and Joel Greenblatt's Gotham Neutral Fund is down around 8%. In addition, the Valueline Arithmetic Index is down 6% in the past six months. (Source: Hays Advisory November 12, 2015)

US economy still good

The somewhat disappointing initial read on Q3 GDP was revised upwards in the second report, and other data points have been mixed. Once again consumer spending has been solid, with houses and autos showing strength. I continue to believe that the Fed is likely to raise the targeted Fed Funds rate in December, and reiterate that I don't see that as a catalyst for a market correction provided there are no hawkish comments with regards to the pace and degree of future rate hikes. Eventually there will be talk of a subsequent hike, but historically the market handles the initial stages of a tightening cycle very well.

My overall takeaway is that despite the headwinds of a (once again) surging dollar and weak energy prices, the US economy continues its slow but steady expansion. Absent a change in that trend, I don't expect a material downdraft in equity prices, broadly speaking. That said, finding cheap stocks has become more difficult as absolute valuations of stocks are somewhat expensive, and bonds are very expensive. Several equity market and asset allocating strategists I follow are warning that returns from today's levels are likely to be subpar for the next few years.

My strategy won't change, and I won't chase the mega-caps stocks that have dominated this year. I will favor larger stocks and also focus on stocks that have sizeable domestic operations, that have pricing power, that have a nearby catalyst, and that may be tax-loss sales candidates as 2015 closes. For a number of Peattie Capital clients attractive and rising dividends is a must.

Outlook for 2016

2016 is an election year, and according to Ladbrokes, Hillary is the 4-5 favorite (Source: Barron's November 30). By itself this is neither good nor bad as markets can perform well regardless of which party occupies the White House. More important will be the makeup of Congress, and a close Presidential race might contribute to uncertainty which could limit the market's progress until the outcome is clear.

It looks like 2015 will end with a small gain and in the 10 times the market has closed between -3% and +3% since 1945, the following year the market was up an average of 12.8% and was higher 80% of the time. There was only one year when it was flat for a second year, 1948, when it fell 0.7% (Source: Barron's November 25, 2015).

Stock picking is still a good way to go

Peattie Capital believes that paying the right prices to own the right stocks is a good approach to the market. For some clients, depending on their specific characteristics, I might also overlay a tactical hedging program to protect against material downdrafts which might consist of boxing existing long postions, shorting, or raising cash.

In other words, for long term investors, I (mostly) agree with Warren Buffett's comment that "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." That is still the approach for most, not all, Peattie Capital clients as difficult as it is sometimes.

Here is an updated version of 2015 Peattie Capital recommended stocks, using closing prices from November 30.

This chart shows all PCM's recommendations for the past 11 months showing an average return of 6.4%.

Additional recommendations are available on request. This table does not include speculative
and short sale candidates which are only appropriate for clients who have requested them.

PERFORMANCE OF PCM RECOMMENDED STOCKS

Date
Name
Ticker
Action
Price
Close
Gain
  10/2/15 ViaSat VSAT Buy $65.50 $61.98 -5.4%
  9/2/15 Google GOOG Buy $590 $742.60 25.9%
  8/4/15 DexCom, Inc DXCM Buy $85 $85.02 0.0%
  7/2/15 Cogent Communications CCOI Buy $32.50 $33.56 4.3%
  6/2/15 Express Scripts ESRX Buy $86.00 $85.48 -0.6%
  5/4/15 Align Technology ALGN Buy $59.00 $66.74 13.1%
  3/4/15 Sabre Corp SABR Buy $21.60 $29.26 36.7%
  2/5/15 Cogent Communications CCOI Buy $38.50 $33.56 -10.2%
  1/5/15 Monmouth Realty MNR Buy $11.60 $10.42 -6.3%
   
 
NOTES: Gains include dividends. All numbers are unaudited.
The risk of loss always exists, and past results
are not necessarily indicative of future results.

There is no recommended stock for this newsletter

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

CLOSE THIS ISSUE


November 2, 2015

 



October 2, 2015

 



September 2, 2015

 



August 4, 2015

 



July 2, 2015

 



June 2, 2015

 



May 5, 2015

 



April 5, 2015

 



March 4, 2015

 



February 4, 2015

 



January 8, 2015

 

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