Stocks Soar To New Heights
The stock market continued to soar in the third quarter, even reaching new records on the S&P 500 and the NASDAQ 100 indexes. On one level, this upward movement is surprising, coming at a time with millions of unemployed workers and many businesses across the country having been wiped out. The truth of that matter, though, is that we have seen is not a general market strength, but a skewed picture in which the big grow bigger, while the small are no more.
If you are lucky enough to have a business that efficiently functions in a virtual environment, that business is likely thriving; if your business is tied to the real world of bricks and mortar and in-person customer interaction, like many department stores and restaurants, you are looking at a severely uncertain value proposition. The present situation again focuses my thinking about the basic thematic strategy of the Mott Capital portfolio that I have referenced in prior reports: identifying societal and economic developments that point to companies prepared to exploit these trends for growth over a long term horizon. It was this kind of analysis that brought me to several current positions in the portfolio, such as Visa and Mastercard, or Tesla, Apple, and Microsoft. I plan to stay with this analytical outline to guide stock selection as we go on.
Portfolio Run Down
While I am yet to make any new additions to the portfolio. I am happy to report that as of September 30, the Mott Capital Management Thematic Growth Composite, net of fees and transactions and inclusive of dividends, has risen by 12.51%. This is versus an S&P 500 Total Return, inclusive of dividends, gains of 5.58%
The quarter’s strong performance was driven by Tesla, which increased by 98%. Through September 30, the stock has risen by almost 413%, a more than five-fold gain in 2020, making up for 5 years of sheer torture.
As part of those significant gains, we did pare our shares back in the stock. The position merely became too big, with the stock accounting for more than 20% of some accounts. In fact, I was forced to pare it a second time, after the 5-for-1 stock split, because it again rose to nearly 20% of some portfolios. The stock still represents around a 10% position across most portfolios.
To be honest, it took years for the market to finally realize what I had been saying all along. Tesla does more than make cars. It has a unique technology in batteries and energy storage that other companies are having a tough time replicating. Every new EV that comes to market is dubbed the next Tesla killer, yet, they seem to disappear from the market as quickly as they arrive. I have very rarely seen a Chevy Bolt, Jaguar i-Pace, Audi eTron, or other EV’s. I see plenty of Tesla’s, S, 3, X, and Y’s on the road every day, and they grow in numbers. Tesla has a unique technology and just happens to wrap it in the shape of a car like Apple does with its iPhone.
Speaking of Apple, it was the second best performing stock in the quarter, with the shares rising by almost 27% after announcing a 4-for-1 stock split and reporting better than expected quarterly results. Investors have been eagerly awaiting the rollout of the latest iPhone that encompasses 5G wireless technology. That rollout finally came in the middle of October. Many analysts believe the new iPhone 12 will result in a massive upgrade cycle.
Mastercard was up by over 14% in the quarter as investors continue to favor companies with a presence in digital transactions, an essential strength during a time when people are spending more time at home and e-commerce sales have soared.
Here’s how the rest fared:
The big rallies we have seen in the market have been driven by momentum and not fundamentals. When looking at the S&P 500 from a valuation perspective, the index is very expensive on a historical basis. Investors have chosen to write-off 2020 and, by the looks of it, potentially 2021. It leaves a potential vacuum should that momentum fade because it will take a very sharp drop in the S&P 500 before attracting investors that focus on valuations.
Based on my estimates, I believe it would take a decline to around 2,850 to attract investors should the momentum trade finally break. That would amount to a drop of approximately 16%.
Overall, I am cautiously optimistic about the equity market. However, I am fearful that several risks are still on the horizon that makes me believe now is not the time to be ultra-aggressive in adding to our equity exposure. For example, we simply do not know what the winter will bring should Congress not pass another relief bill or one not sufficient to cover enough of the economic strain of the pandemic closures. It seems unclear how the vacancy waves in commercial real estate will trickle down to other parts of the economy. I fear that if coronavirus cases surge, the perceived threat to business and personal economic well being may result in another recession.
In a way, I have taken an approach of “if it isn’t broke, then don’t fix it.” The longer we can get away with a portfolio that performs in line with or better than the S&P 500 is fine with me. It buys us the time we need to see how the economy and corporate earnings recover while giving us plenty of cash should there be a pullback in the equity market.
Overall, most accounts currently have around 40% of their assets in cash. Although I have plenty of target stocks in mind to deploy that cash, I will not do so until I feel the time is right for general market growth or when an incredibly strong single stock opportunity presents itself.
In the meantime, I will work my hardest to understand the current investment landscape while continuing to identify new long-term thematic strategies shaped by generational and demographic shifts.
N.A. – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. †
Performance reflects the non-annualized performance from 8/1/2014 to 12/31/2014.
** For periods with less than 36 months of composite performance, no 3-year ex-post standard deviation measurement is available.
Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Mott has not been independently verified. The Thematic Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors. The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies. The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash. The strategy only invests in stocks, ADRs, and ETFs denominated in USD, although may not invest in all such securities at any given time. The All-Cap Growth Composite was created June 2015. The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States. The index is shown as a general market indicator and may not reflect the same exposures as the composite. The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder. Actual investment advisory fees incurred by clients may vary. Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Performance shown represents total returns that include income, realized and unrealized gains and losses. Net of fee performance was calculated using actual fees. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor’s domicile. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The annual composite dispersion presented is an asset-weighted standard deviation calculated using accounts in the composite the entire year. The 3-Year Standard Deviation represents the annualized standard deviation of actual composite and benchmark returns, using the rolling 36-months ended each year-end. The 3-Year ex-post Standard Deviation of composite and benchmark returns is not presented because the composite strategy has less than three years of history.