Large Cap Commentary – November 2010
We recently held winter Investment Outlook luncheons with clients. The theme of our talk was “How to Invest in a Rapidly Changing World”. Given the tumult both the market and the economy have experienced over the past years, it is difficult to argue that we are in anything but a rapidly changing world. Coincident with the volatility that accompanied the onset of the recession was volatility within our portfolio; our turnover increased during the recession as we purchased market-leading companies being sold off along with the rest of the stock market. Had the recession deepened and had investor’s perceptions worsened it was likely that our new names – Allergan (AGN), Google (GOOG) and MasterCard (MA), to name a few – would have fallen further in value. Perceptions, then, play an important role in investment results.
My focus during our presentation was on the economy. As we were gathering information for my presentation, the following graphic, in particular, struck me.
Before discussing this slide I went through a litany of concerns affecting the market, both foreign and domestic, including the PIIGS (Portugal, Italy, Ireland, Greece and Spain), high U.S. unemployment and the advent of QE2, the Fed’s latest effort to battle our anemic economy with what is know as “quantitative easing”. On two separate days I asked a group of well-informed investors how far below the prior peak was our nominal gross domestic product (GDP) today. One attendee correctly identified my query as a trick question, while the other 160 or so attendees made guesses indicating that they believed we were below the prior peaks of 2008. As illustrated by the chart above, the U.S. is at a record level of nominal GDP.
This contrast between perception and reality represents a powerful potential positive for the market. Just as in the early 1990s, when George H.W. Bush lost his bid for re-election, investors and the public in general were slow to embrace the fact that the U.S. economy was in recovery. John Meara, Argent Capital’s Chief Investment Officer (CIO), stresses the importance of dealing with the facts in our investment discussions. The above graph represents one of the most compelling facts that we have seen for a long time. Coupled with a market trading at 12 to 13 times forward earnings, with earnings and revenue estimates rising, we at Argent believe domestic large cap stocks represent “favorable odds”. Within this attractively valued pool, our job is to identify the next GOOG, AGN or MA, and put those stocks into our portfolio to reward our investors for over the next three to five years.
As always, 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. Past performance is no guarantee of future results. 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 within these sectors were or will be profitable. A list of stocks recommended by Argent in the past year is available upon request.
