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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January 30, 2019
Fourth Quarter 2018 Investor Letter
The fourth quarter of 2018 was an outright horror, with the S&P 500 total return index dropping a stunning 9% in December alone. Since 1988, there were only six months that saw steeper declines. It is the type of month that does not happen often, and we can only hope that it does not happen again for a very long time.
For the full quarter, the S&P 500 total return fell a stunning 13.6% giving up all its gains from the first nine months of the year. The S&P 500 total return index (which is inclusive of dividends) managed to finish the year down by 4.4%, while the S&P 500 (which does not include dividends) dropped 6.24%. We, unfortunately, did not fare any better, with the MCM Thematic Growth Composite declining by 8.08% including all fees and transactions costs.
Returns for 2018
|Thematic Growth -8.08%||S&P 500 Total Return -4.4%||S&P 500 –6.24%|
There is no sugar coating these results; some of our portfolio stocks were hammered during the quarter, with only 3 of the 18 rising. Also not helping was the overall market volatility that made the losses in stocks that were already falling steeper and more severe.
Top 3 Winners and Losers for 4Q’18
|Tesla Inc. (TSLA) +25.7%||Alkermes (ALKS) -30.5%|
|Verizon (VZ) +5.3%||Apple (AAPL) -30.1%|
|Diageo (DEO) +0.1%||Netflix (NFLX) -28.5%|
The losers were the driving story of the quarter.
An FDA advisory panel decided to vote against Alkermes’ depression treatment ‘5461, rendering full FDA approval highly unlikely. Additionally, the company presented data in December for its schizophrenia treatment ‘3831. The drug did show efficacy, but the data underwhelmed investors. This latter drug has the potential to find a viable user market and create value for the company, but to sit in the stock for another 2 to 3 years waiting for the drug to reach prospective patients is not a good use of investible resources at this point, and the steep pullback in the broader market has created too many other opportunities. Therefore, the stock was removed from the portfolio during the first few weeks of January.
Apple dropped sharply as investors became concerned about iPhone sales and slowing global growth, an issue made more uncertain by the trade war with China, Apple’s second largest market. In our opinion, many of these market jitters are overblown, and the stock seems exceptionally oversold at current values. It is becoming increasingly apparent that Apple’s future is not the iPhone, but instead its iOS software, services, and wearable businesses, all of which are growing much faster than iPhone sales. Apple did provide solid second quarter guidance recently, which has helped the stock rebound from its lows.
Netflix fell sharply during the quarter along with the broader market. Overall, the company continues to execute and recently reported a solid fourth quarter adding nearly 8.9 million paying subscribers. The company expects to see similar growth when it reports first quarter results in April. Netflix now has almost 140 million global subscribers. The stock has already recovered nearly all of its fourth quarter losses in the first few weeks of the year.
Tesla shocked investors when it delivered strong third quarter results easily topping analysts’ revenue and earnings estimates in October. The company continues to build out its model 3 business and is now in the process of starting shipments to Europe and China.
Verizon and Diageo I will not review because their performances were largely driven by investors reaching for safety.
In addition to the sale of Alkermes, there have been many other changes to the portfolio since the beginning of 2019. Over the first four weeks of the year Celgene, Vodafone and Altria were removed from the portfolio. We sold Celgene after Bristol Myers Squibb said it would acquire the company, closing out our holding. Vodafone’s prospects in India continue to worsen as competition continues to heat up and the position has been sold. Finally, due to shifting trends towards smoking and electronic cigarettes, Altria was taken out of the portfolio. The stock does not afford the same safety and security that it historically offered.
Microsoft has been added to the portfolio, just recently. The company is a leader in cloud computing with its Azure platform. Additionally, it offers excellent software as a service product in Office 365 and has a tremendous opportunity in the future with its video gaming unit.
As a result of the removal of these positions, accounts are holding an above average level of cash. More stocks will be added to the portfolio to return our holding to a more typical invested percent profile.
Overall, the market is likely to continue to recover throughout 2019. There is little evidence to suggest that earnings in 2019 will fall sharply from their 2018 levels and no meaningful indicators that the US is heading toward recession.
As we read the current signals, the stock market has reached extremely undervalued levels. The S&P 500 is likely to rise in 2019 and has the potential of reaching a range of 3,000 to 3,100, a gain of about 17% from its current level of around 2,665. Undoubtedly this viewpoint is in the minority among most investors, but that is nothing new; our reading of market signals is typically a few months ahead of broader market opinion.
I apologize for sending the letter out so late, but it was essential to finish making all the adjustments to the portfolio first so that I could give you the most accurate and clean look at how things are shaping up and our overall thinking.
As always, I will continue to work my hardest to find new long-term thematic investments that are helping to reshape generational and demographic shifts, all in line with our investing discipline.
Mott Capital Management, LLC
|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 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.