Stocks Roar – The Mott Capital 4Q’19 Investor Letter

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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1/23/20

Stocks Roar to Record Highs

By the broadest margin, 2019 was the best year of performance for the Mott Capital Thematic Growth Composite, which soared by 35.85% (net of fees and transaction costs; individual account returns may vary). The portfolio crushed the S&P 500 Index gain of 28.88% excluding dividends, and easily beat the S&P 500 Total Return Index increase of 31.45% inclusive of dividends. The S&P 500 also managed to exceed my target for 2019 of 3,200, finishing off on December 31 at 3,231. It was quite a year.

Quarterly Summary

Thematic Growth Composite Performance

Thematic Growth Composite +35.85%

S&P 500 Total Return Index +31.45%

S&P 500 Index  +28.88%

It became clear by the start of the fourth quarter that the overblown fairytale calling for a recession in 2019 had all but vanished. Additionally, the Fed made life easier too, clearly signaling  it was in no rush to take back any of its three interest rate cuts it made in 2019, reducing the fed funds rate from a range of 2.25 to 2.5% at the beginning of the year to a range of 1.5% to 1.75% by October. Instead of tapping the brakes on growth with upwards rate tweaks, the Fed now seems poised to allow inflation to run above its symmetric 2% target.  Also, with the pending signing of a phase-one China trade deal on the table during the fourth quarter, there was nothing to hold the stock market back. The equity market broke free of its 22 months of stagnation, essentially becoming unleashed from the fears that gripped it.

I continue to believe that stocks have further to rise in 2020, but the gains will not be as robust. Instead of entering a year trading at depressed and oversold prices, stocks entered 2020 trading at record highs and fairly valued levels so I don’t anticipate the same significant returns we witnessed in 2019. However, I do believe that in this low-interest-rate environment, along with a positive technical setup and forecasts for substantial earnings growth, the S&P 500 can approach 3,600 in 2020, which is higher than my previous forecast for around 3,400 in my third quarter letter.  My new target number implies a gain of about 11.5% from the S&P 500’s level on December 31, 2019.

The Best and Worst for FQ’19 and FY’19

Best Performers/Worst Performers In 4Q’19

Tesla (TSLA) +73.7%

Unilever (UL) -4.9%

Skyworks (SWKS) +52.5%

Cisco (CSCO) -2.9%

Apple (AAPL) +31.1%

Verizon (VZ) +1.7%

 

Best Performers/Worst Performers in 2019

Acadia (ACAD) +164.6%

Cisco (CSCO) -4%

Apple (AAPL) +86.2%

Verizon (VZ) +9.2%

Skyworks (SWKS) +80.4%

Unilever (UL) +9.4%

Winners

Acadia (ACAD) was the best performing stock in 2019 in the portfolio, rising by more than 164%. The biggest jump happened at the end of the third quarter when the company announced the successful completion of their dementia-related psychosis trial. As a result, the company plans to submit a supplemental new drug application (sNDA) to the FDA by the summer of 2020. Given that Pimavanserin has a breakthrough therapy designation, I believe there is an excellent chance the drug receives approval before the end of 2020.

Tesla (TSLA) had an incredible fourth quarter, with the shares rising by around 74%. The robust performance has continued into 2020, with the stock increasing an additional 36%, through January 23. The company posted a surprise third quarter profit and announced it would begin its first shipments from its Shanghai Gigafactory to customers in China, as well as the introduction of the Cyber Truck, which received over 250,000 reservations.  Additionally, 2020 should be an exciting year as well, as the company continues to ramp-up its growth plans in China and looks to expand into Europe with its fourth Gigafactory based in Germany. Finally, the company will begin the production of its mid-size SUV, the Model Y.

Skyworks (SWKS) increased by over 50% in the fourth quarter and by over 80% for the year. The stock of the Apple supplier jumped higher in October on news that the Apple iPhone 11 was selling better than expected. Additionally, investors have started to focus on the release of the fifth generation of wireless technology, 5G. Skyworks could be a big winner in the roll-out of 5G, and the handset upgrade cycle that comes with the innovative technology.

Apple (AAPL) rose by over 30% in the fourth quarter and by 86% for the year, as the company continues to drive service revenue higher along with the explosive growth in its wearable business segment. The growth has allowed the company to become less dependent on the iPhone, and as a result, investors have been more willing to pay a higher P/E ratio for Apple’s earnings and growth prospects.

Losers

Unilever (UL) fell by almost 5% in the fourth quarter but managed to increase by 9.4% on the year. The company’s fourth quarter decline followed a disappointing sales outlook, noting it would be at the lower end of its prior range.  The story for the company hasn’t changed much over the years, with prospects for growth coming from many emerging markets. I continue to believe this company offers a level of stability to the portfolio, and its reach into the growing middle class around the world remains very attractive over the long-term.

Cisco (CSCO) fell in the fourth quarter by almost 5% and was the only stock in the portfolio down for the year, declining by 4%. The stock was added to the portfolio in early 2019, and I still believe it is well-positioned to be a player in 5G wireless equipment down the road. Cisco was hit hard by the trade war between the US and China, and I hope it can recover now that the trade war appears to be easing. At this point, I see no reason to make a change.

Verizon (VZ) rose by 1.7% in the fourth quarter and by 9.2% for the year. Verizon is another company that should benefit as wireless subscribers upgrade their data plans from 4G to 5G. Additionally, the roll-out of 5G and the technology changes that it is likely to usher in will make having wireless data connections in the future more important than today. Again, Verizon appears to be a critical player in 5G and will continue to hold a place in the portfolio.

Portfolio Update

I made no changes to the portfolio in the fourth quarter, and the cash levels remain between 5 and 10%. That is slightly higher than our historical cash holdings, but I haven’t found anything recently that has hit me as a must own as it applies to our thematic approach.

Moving Into 2020

As 2020 begins, we can look back at 2019 with a feeling of success. It was, for the most part, an unexpected and surprising year for many investors. However, our analysis told us from the very start of 2019 that the recession fears would be unfounded, and sure enough, it was the correct call.  Despite the significant gains of 2019, I still believe that the portfolio is very well situated to thrive in 2020.

As in the past, 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.

If you liked to learn more about investing in this strategy, you can visit my website here.

As always,

-Mike

Michael Kramer 
Founder/Portfolio Manager
Mott Capital Management, LLC
516-642-5788

Mott Capital

 

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 recommendation 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.  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. 

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