Large Cap Commentary – March 2015
In like a lion, out like a lamb. The winter of 2015 was not overwhelming for those of us in the Midwest and because of that I believe most of us expected a steady progression into Spring. However, March came along and people were forced to double check their calendars. Sure enough, it was still winter. The markets, however, have been very tame on a year-to-date basis. The S&P 500® Index has risen all of 0.5%. Not negative, which is a good thing, but hardly the 30%+ upward move we enjoyed in 2013, or the more ordinary 12% rise of last year.
Lately, we have been saying we believe the market is more fairly valued, with large companies priced around 16 times forward earnings estimates. This year there have been two headwinds that have impacted the market, and in particular, large cap stocks. First, is the rise of the dollar; second, is the collapse of the energy sector. The dollar’s rise makes translation of foreign sales smaller – a Euro of earnings isn’t worth as much in dollars as it was last year. This affects companies with foreign business exposure and tends to impact larger companies (which do more business overseas) to a greater degree than smaller companies.
The collapse of oil prices and the depressant fallout on the energy sector directly impacts oil exploration and production companies as well as oil service companies. Secondary impacts include industrial companies which provide heavy equipment for oil exploration and transport companies which move product, to name just two. Suffice it to say, while lower gasoline prices benefit consumers, they do not come without other associated costs.
These two headwinds, the stronger dollar and weaker energy prices, have lowered expected earnings for the market as a whole, creating a less positive backdrop for investing. In fact, the current environment is unlike one we have experienced for several years. When we at Argent Capital invest in a company, one confirmation of our investment thesis is rising earnings estimates as companies report quarterly results. Clearly, the current market is not passing this litmus test.
While it is fair to say that this environment is more difficult for investing as a whole, it is not necessarily more difficult for us at Argent. Remember, our strategy of selectivity produces a relatively concentrated portfolio of 30 – 35 stocks. While the majority of earnings estimates of stocks in the S&P 500 may be falling, that does not mean all stocks are experiencing the same trend. Our job at Argent is to find those few, unique companies that have firm-specific drivers of growth and profits to give these companies an inherent advantage over the average stock. This adherence to process serves us well in all market environments. In the first quarter of 2015, our portfolio returned 5.59% (gross of fees) compared to 0.95% for the S&P 500. More importantly, while we always know things can change, our longer-term performance is also very favorable.
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. Past performance is no guarantee of future results.