Large Cap Commentary – September 2014
We at Argent have a long-term investment philosophy and on average, we hold a stock for over three years. We create “long putt” scenarios, or an ultimate good case for each stock that we own. In order to increase the odds that we realize that best case scenario, we also track “short putts”. The battle, of course, is always weighing the myopic headlines of the day versus the real and sustainable trends for a specific company or the market.
This year in particular, that push and pull seems to have elevated. Thus far, we have booked five consistent years of up markets. Some of our clients and many pundits are insistent that the “due theory” is knocking on our door. The theory is derived from the belief that we are due for a correction, or a recession, or a…the list goes on. In some fashion, the theory has credence. Mathematically, the longer the markets rise, the more likely is a pull back. Rather than being pollyannas, we at Argent take a balanced view of the data and judge what we find against our “north star” for either a stock we hold, the market or the economy.
Looking at the world based on this analysis, there are some legitimate reasons for concern. Europe, which had been an area of strength, is weakening. Mario Draghi, the president of the European Central Bank, has been moving in the direction of quantitative easing. While quantitative easing policies helped the U.S. economy, Draghi’s actions reflect a slowdown within the Eurozone. Ford Motor Company (F), lowered guidance for its earnings and some worry that F’s comments reflect that the current recovery is a bit long in the tooth. Coming out of the Great Recession, the auto industry has recovered nicely and auto sales in the U.S. have been robust.
These reasons, as well as many other issues, may explain the market turbulence as of late. Most certainly, we will gain more insight into the direction of the market as companies post their third quarter earnings results in October and provide guidance into 2015. Despite headlines, we at Argent, are of the opinion that results and guidance should generally be favorable.
We talk often about our tool for measuring the valuation of the market, The Rule of Twenty. Today, The Rule of Twenty states that the market should be trading at almost 18x forward earnings. Instead the market is trading at 15x earnings, clearly pointing out that some concerns are embedded within today’s market valuation.
At the same time, the economy continues to show marked improvement. The unemployment rate is a case in point. For the first time since July of 2008, the unemployment rate in the U.S. has fallen below 6%. This trend is a distinct positive for our economy and our stock market. Recall that 70% of our economy, as measured by Gross Domestic Product (GDP), is driven by consumers. As more Americans are employed, the more they will spend to the benefit of Corporate America and the economy in general.
How third quarter earnings and the rest of 2014 will play out is anyone’s guess. However, given the relatively low valuation of the market today, even after its stellar five-year run, and the steady improvement in our economy, we at Argent continue to be optimistic. We are pleased with the current positioning of our portfolio and we will continue to apply our disciplined process in order to find opportunities possessing favorable odds.
As always, we appreciate your interest in Argent Capital Management.
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.