Large Cap Commentary – June 2013
In St. Louis the weather has turned hot and this month the New York Mets will host baseball’s All Star Game. To me, these events indicate that we are already half way through 2013. As such, we can evaluate market performance for the first half of 2013. Looking at the relevant large cap indices, the Russell 1000® Growth and the S&P 500®, both show double digit returns. As I wrote after the first quarter of 2013, double-digits is always nice. In fact, I think most investors would be happy to book an over 10% return for the year. If we stand still, we are already there.
Due to the most current market run, we have fielded a fair number of questions asking if this is the top. We at Argent do not think so. While it is true that the Price-to-Earnings (P/E) ratio of the market has climbed throughout 2013, we look to our “Rule of 20” to determine value. That rule suggests that if we subtract current ten year interest rates from the number twenty, the difference should equate to the current P/E of the market. With ten year interest rates of between two and three percent, resulting P/E’s should be in the range of 17x earnings. In reality, it is well below that today.
However, some of the potential for upside will be supported or diminished during the month of July as public companies report their second quarter earnings results. Overall, we expect numbers to be good, but not great. We also expect that companies that have more of their revenue generated in the United States, versus the rest of the world, to fare better. Not surprisingly, we have structured our portfolio to accommodate that bias – leaning into a continued, albeit anemic, U.S. recovery, investing in many companies with little exposure to emerging markets and Europe. We believe this portfolio tilt provides us with favorable odds as we enter into the rest of 2013.
In seeking favorable odds, one area of the market which we believed was relatively over-valued was the bond market. Given three decades of declining interest rates, investors had been increasingly hungry for yield. As a result, flows for years into bond mutual funds have been quite strong, while flows into equity (stock) mutual funds have been negative. As interest rates began their upward march over the past few months, bond prices have fallen and large bond funds have witnessed redemptions. Once again, the hidden hand of the market has begun leveling the playing field for investors.
At Argent Capital, we invest for total return (dividend plus capital appreciation), with a focus on favorable odds. If the valuation for higher dividend stocks is depressed, that piques our interest. If the valuation for high organic growth stocks (with lower dividends) is depressed, that also piques our interest. Oftentimes, this puts us at odds for a time with any particular favored investment class. In the end, however, as we focus on our long-term investment horizon, we believe the hidden hand of the market will normalize valuations and push our stocks upward.
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. 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.