Large Cap Commentary – May 2010
The month of May brought the return of volatility to the markets. Concern over Greece introduced another acronym, PIIGS (Portugal, Italy, Ireland, Greece and Spain), to investor’s vocabulary and worries rose as news of the Deepwater Horizon tragedy played out above and below the waters of the Gulf of Mexico. Investors reacted as they always do in the face of new uncertainty – they sold.
Our stocks did not avoid the sell-off. We at Argent say that we jump into the equity pool, so clients should not be surprised when we get wet. In other words, when the stock market is dropping, Argent’s portfolio is likely declining as well. Similarly, when the market is rising, we expect our portfolio to follow suit. A value-add we try to provide our clients is some mitigation of the volatility that is inherent in equity investing.
I have mentioned “Favorable Odds” frequently over the years of writing Argent commentaries. One aspect of favorable odds which is a core part of our investment process is that we buy quality companies. That might sound simplistic, however, where we try to add value is in how we define and identify “quality”.
Molex (MOLX), an electronic connector company, is an example of a quality stock for Argent. MOLX has a low debt level, currently at 9% of its assets. More importantly, MOLX is experiencing an improvement in its returns, as earnings estimates have sharply risen. In May of 2009, Wall Street expected the company to earn $0.25 per share for 2010. Today, those estimates are closer to $1.10. MOLX has driven better returns by following the right strategy of closing underperforming manufacturing facilities abroad. The company’s goal is to increase capacity utilization and realize higher operating leverage in its business.
Many investors would not define MOLX as a quality holding because the company has had operational issues in the past. As a result, MOLX’s growth rate and returns suffered. However, what makes MOLX a quality stock for Argent is the strength of its balance sheet coupled with the positive fundamental change that the company is experiencing today. Rising sales and earnings estimates for MOLX validate our strategy. With the company currently trading below a market multiple on forward earnings, we believe that investors are giving MOLX little credit for its positive change. We expect the company to continue to “right size” its operations which will result in an increase in its incremental profit margins. Even with the improvement MOLX has posted, its operating profit margin is below prior peaks, and well below peer levels. That gives us confidence that MOLX is in the early stages of profit improvement.
While we cannot immunize our portfolio from the market’s volatility, we can increase the portfolio’s likelihood of success by carefully selecting quality stocks that fit our investment process. As always, we seek to identify those companies possessing favorable odds for our clients.
We appreciate your interest in Argent Capital Management and hope you will mention our name to others. If you have any questions or comments, please visit us at www.argentcapital.com.
Sincerely,
Ken Crawford
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Not all Argent clients may own each stock discussed in this overview. Argent portfolio managers may recommend the purchase or sale of these and other securities for their client’s accounts. A list of all stocks recommended by Argent during the past year is available upon request. Past performance is no guarantee of future results.
