Stocks Rebound Sharply
If I had told you last December 31 that the S&P 500 would plunge by 19.6% in the first quarter, and followed that with a 19.95% rally in the second quarter, you would have laughed, thinking that is pure insanity. But that is what happened. Investing has never been easy, and in today’s complex world – filled with exotic derivative products, sophisticated algorithms, and passive ETFs- it is more challenging and confusing than ever.
By many metrics, the S&P 500 is more overvalued today than at any point in recent memory. I would have to go back to my college days in the late 1990s to find a time with this much euphoria and froth in the market.
The U.S. economy is a mess, left in shambles by a coronavirus that is unlikely to go away anytime soon. But it isn’t only the U.S. economy; it is the entire world that is battling this pandemic.
As of June, there were approximately 17.7 million people unemployed in the U.S., or 11.1% of the active workforce. The Atlanta Fed projects that the second-quarter GDP will decline at an annualized rate of 35.5%, while profits for the S&P 500 in 2020 may plunge by almost 31%. Truly a mess.
However! The S&P 500, as of June 30, was down a stunning 4 % on the year. Amazing, indeed. How? Investing at times can be more about emotion and momentum; then, it is about logic and fundamentals. Eventually, logic and fundamentals do return, but how long that takes and when it happens is anyone’s guess.
The Federal Reserve and the Federal government have done everything in their power to bridge the economic gap caused by the pandemic. However, by my estimates, the steps taken to date will not be enough. The virus has not gone away, and that means rolling periods of opening and closing of the economies around the globe until a vaccine or effective therapeutic is found. Until then, we are living in a new normal, which is not normal at all.
Portfolio Run Down
Thematic Growth Composite Performance
Thematic Growth Composite
S&P 500 Total Return Index
S&P 500 Index
The good news is that our portfolio, despite a substantial cash allocation, performed exceptionally well. As of June 30, 2020, I am happy to report the MCM Thematic Growth Composite (net of fees and transaction costs) was up 0.22%. This result compares very favorably with the S&P 500 Total Return (including dividends) decline of 3.1%, and the S&P 500 (exclusive of dividends) drop of 4%.
Reflecting my concern with current market signals, the size of the portfolio is made up of just nine stocks as of June 30, while accounts, on average, carried roughly 30% in cash. Cash balances fell in the quarter as a percentage, due to the significant advance of our equity holdings. There were no new positions created in the second quarter; I continue to view the uncertainty of the economy and the rapid rise of the stock market to be dangerously disconnected.
Tesla was the best performing stock in the portfolio, with shares rising by over 106%. The stock has managed to shock investors as it delivered a profitable first quarter and then managed to deliver many more cars than expected in the second. Now the company stands on the cusp of inclusion into the S&P 500 should it post a second-quarter profit, its fourth consecutive quarter in a row. Since the June quarter ended, the stock has risen an additional 38.6% to around $1,500 per share, as of July 14
The holdings in Tesla became so large, approaching as much as 20% in some accounts, I was forced to reduce the position, and cut it in half. Again, at this point, Tesla is still well-positioned to grow as it begins to roll out its mid-size electric SUV the Model Y, prepares for the launch of its pick-up truck, and the semi-truck.
Apple was the second-best performer rising, 43.5%. Apple’s performance seems to have less to do with anything fundamental, and more to do with a flight to safety. The company offers investors a relatively clean balance sheet, buffered by a massive stockpile of cash, and if any company can whether the pandemic Apple can. I am still very excited about their future and believe the ecosystem Apple has to offer is something that is still just beginning to grow.
Finally, Microsoft rose by 29.1% for the quarter, and again like Apple, it was very much for the safety of its balance sheet. But also, Microsoft brings together all of the needs of this new remote working and learning world, using its cloud computing and office 365 products. There isn’t a company in a better position to benefit in this new world than Microsoft.
Here’s how the rest fared:
Due to the sale of half of our Tesla position, our cash balance has returned to the 35-40% level across most accounts. I do have a very long list of stocks I would like to put that money towards, but this doesn’t feel like the right time to put it to work. Given our strong performance this year versus our benchmark, it seems prudent to continue to move ahead defensively and to be patient. I am attempting to buy as much time as possible to give us the best look into the future and to get a better feel for the economy and how a global recovery may look, along with corporate profits.
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.
If you should know of anyone whom you feel would appreciate this letter or would like the opportunity to learn more about how to invest with me, please feel free to pass along this letter and my contact information.
† 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.