Large Cap Commentary – December 2010
As we close out the year and the first decade of the 21st century, the investment prospects for large cap U.S. equities appear promising. S&P 500® earnings and revenue estimates for 2011 are up over 2010, with consensus earnings growth of +12.7% and revenue growth of +5.8%. In addition, the valuation of the market trading at 13.6x forward earnings – looks attractive, especially in light of a low interest rate environment.
Economic data is more positive than not as well. For instance, the January 5th, 2011 ADP employment report was up 297,000, well-above expectations of +100,000. This is the biggest gain since the report’s inception in 2000. In addition, Challenger, Gray & Christmas reported that the number of job cuts in 2010 was the lowest since 1997. Finally, Moody’s Analytics estimated that commercial and industrial lending during the fourth quarter of 2010 grew for the first time in two years.
Within this mass of stability and improvement, we at Argent seek companies possessing a catalyst which differentiates them from their peers. In other words, we seek companies we believe will perform well even if their peers or the general economy does not. Finding those few unique names creates a portfolio with true staying power.
An example of the kind of stock we prefer is Jabil Circuit (JBL), a recent addition to the portfolio. JBL is a contract manufacturer that historically assembled personal computers, routers and other “boxes” for information technology companies. As you might guess, the tech boom of the late 1990s was a very prosperous era for JBL and its competitors. However, with the internet bust, JBL’s returns fell. Recently, JBL has cut its investment in what is known as commoditized assembly and shifted its focus to new areas. These include healthcare and the auto industry, where contract manufacturing is in its infancy, but where the potential exists for higher margins and revenue growth. Today, this newer business represents nearly one-third of JBL’s sales and boasts high profits. Meanwhile, JBL is trading at 9x 2011 forward earnings, well below its 10-year average valuation. With the catalyst of new business at higher margins and a valuation that we believe does not yet reflect this fundamental change, JBL represents an excellent investment opportunity for our clients.
As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others.
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.
