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Small Cap Commentary – 2Q17


The Argent Small Cap Core Equity strategy ended the second quarter of 2017 on a high note, returning 4.49% (net of fees) and outperforming the Russell 2000® Index return of 2.46%.  Additionally, on a year-to-date basis, the strategy is up 9.5% (net of fees), and has outperformed the benchmark by 4.5% (net of fees).  While we are extremely pleased by this performance, we turn our attention a new earnings season.

During earnings season we listen to reports from companies we currently own, those we are considering for portfolio inclusion, and also those that are clients or competitors of our portfolio names in order to measure progress. While every reporting season is important, this round we will be particularly focused on earnings growth and company outlooks.  That is because in the last few years small cap markets have experienced a valuation tailwind (i.e. the price-earnings ratios have been increasing).  Going forward, the burden will be on individual companies to organically grow their earnings in order to improve their stock price.

In our view of the world, the health care sector remains an interesting one.   Although Argent Small Cap health care names did well in the quarter, they did not keep pace with the Russell 2000 health care names.  Over the course of the quarter we positioned the Argent Small Cap strategy for continued strength in this sector by adding to existing positions and initiating positions in a few new names. We initiated a position in Teligent, Inc. (TLGT).  TLGT is a producer of prescription and over-the-counter topical generic pharmaceutical products.  TLGT’s growth strategy is focused on the company’s deep pipeline of internally developed products in order to accelerate future sales growth.  TLGT is also positioning itself to diversify into injectables, complex generics and ophthalmics.  Through the remainder of this year, TLGT is expecting to launch ten to twelve new products and has a pipeline of approximately thirty-six new products.  We believe this is promising for TLGT.

Another area of the market which has been under scrutiny is the energy sector.  It seems investors have become more fixated on the price of oil rather than the fundamental changes occurring within the companies in this sector.  At Argent, we step away from trying to project where the price of oil may end up, and instead seek to identify positive change at individual companies.  As such, we added SolarEdge Technologies (SEDG) to our portfolio.  SEDG is not a traditional oil and gas company, but rather a developer of solar system technologies, more specifically, power inverters.  Headlines for the solar industry focus on the brutal pricing environment for panel producers as well as decreasing demand for U.S. residential use.  However, we became interested in SEDG as the company is successfully executing on their strategy to expand into international markets and further penetrate domestic commercial and industrial markets.  In this regard, SEDG’s projects continue to increase in size and scope.  Additionally, SEDG has a new product, the HD WAVE, which is proving to be a market-share gainer across business segments, including U.S. residential markets.  These positive changes within an unlikely market segment illustrate our process at work.

As Argent clients know, our change-based investment strategy is focused on identifying catalysts which will translate into future earnings growth. The companies mentioned above are two such areas where we have found opportunity – two of the 60 to 80 names we typically hold in our portfolio.  We look forward to hearing these companies report second quarter earnings and evaluating their progress against our original investment thesis.

We appreciate your interest in Argent Capital Management. We have three successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. A brief overview of performance information on all three is attached to this email for your reference and knowledge. If you have questions on any of these please call us .

 

Eddie Vigil

Portfolio Manager

Past performance is no guarantee of future results. Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Argent Capital. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Argent’s presentation thereof.    The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request.