Large Cap Commentary – April 2013
Of late we have heard questions and discussions surrounding the inevitable correction in the market, or, at the very least, the end of the current bull run. Many of our clients have expressed concern about the market’s impending fall, because, as we are at record highs, it is only logical. In all fairness, equities have witnessed a good run from the bottoms reached in March of 2009.
If you fast forward from that point to four years later, the stock market is breaking records. Fittingly, our clients are asking, “what now”? Politically (and honestly) our answer is that we don’t know for certain. In the very short-term, our crystal ball is as clear or cloudy as any other experienced investor. However, when we analyze the market we do find data that indicates the good markets we have experienced over the last four years have some staying power. You may recall, last month, we provided information on several areas of improvement within our economy. Economic improvement propels earnings and earnings propel markets.
In addition to economic growth, borne out by the earnings trend of the market, we also have valuation. At Argent, a fundamental component to our investment process is that we seek companies possessing favorable odds. One material constituent of favorable odds is valuation. We constantly ask ourselves if we are overpaying for a stock, an industry, or a sector. One of the hallmarks of our investment process is that we are disciplined – in others words, we have a set process – yet we are also flexible. This flexibility is driven by favorable odds. We try to go where our client’s incremental dollar of investment is best served, regardless of the company or industry or sector. In the past this has helped, such as in Argent’s early years when we had relatively little exposure to technology companies during the height of the Internet Bubble. At the time, valuations for those companies encompassed all of the good news the technology sector was experiencing… and then some. Thus, a bubble and the antithesis of favorable odds.
Today, even with the four year bull run in the stock markets, we do not believe we are in bubble territory. Below is our often used “Rule of 20” chart. The Rule of 20 states the forward price-earnings ratio of the market (for this purpose, the S&P 500® Index) should be 20 minus the 10-year Treasury bond yield. The 10-year Treasury bond currently is yielding just below 2%, implying that the market should trade above 18x next year’s earnings. Instead, the market is trading around 14x forward earnings. Whether the entire four point spread is valid given the accommodative actions of the Federal Reserve is an open question. However, what is not in question is that the market’s price-earnings ratio remains relatively low. This is why we at Argent believe we are investing in a period of favorable odds.
As always, we appreciate your interest in Argent Capital Management.
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Performance results are total return and presented net of fees, deducting for certain transaction costs, and includes the reinvestment of all dividends and income plus capital appreciation. This is supplied as supplemental information to the composite disclosures presented later in this document. 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.