Large Cap Commentary – August 2016
January 23, 2009 was a great day and not just because it was my birthday. It was also the day we first purchased Google, now Alphabet (GOOG) for the Argent Large Cap Growth portfolio. In March of that same year we purchased Mastercard (MA). Both of these stocks remain in our portfolio today and serve as a testament to our low turnover approach to investing.
A few years after my memorable birthday, when the U.S. economy clearly was in recovery, I remember reading several articles about how the “easy money” in the market had been made. In retrospect that was true, but in early 2009 buying any stock, and, in particular, buying a growth stock, felt anything but easy. However, our forward looking investment process was flagging stocks like GOOG and MA as relatively inexpensive (favorable odds) that were displaying some stability (catalyst) coming out of the Great Recession.
As I have suggested, listening to what our process was telling us and buying those stocks was a difficult decision. At the time, we certainly knew that we were doing something different than most investment managers. Instead of holding cash, or buying “safe” stocks, we elected to purchase truly great growth franchises trading at a valuation discount. Our investment process convinced us that this was how we should invest for the long-term benefit of our clients.
Today, our investment process is highlighting stocks within the Industrial sector as being particularly attractive. Industrial firms are categorized as those primarily involved in heavy equipment and manufacturing. With the backdrop of an anemic recovery in the United States, uncertainty abroad and energy companies like Exxon-Mobil hit by plummeting oil prices, looking at Industrials may seem like an odd choice. It certainly surprised many of us around the investment table when we began to research these companies. Our investment process, however, was highlighting them precisely for the same reason it highlighted companies like GOOG and MA seven plus years ago. Industrials are relatively inexpensive, reflecting the skepticism around the economy, and are showing early signs of stability as the energy sector begins its slow recovery. The chart below shows our increased exposure to the Industrials sector when measured against the Russell 1000® Index.
Also, similar to 2009, we are aware that buying Industrials will cause our strategy to deviate from the market until the earnings power of these companies are realized fully. We are comfortable accepting this difference in performance for the short-term. It is our expectation that when the Industrial companies we have added to our portfolio have stable to improving results, there will considerable upside in their stock prices and our portfolio and clients will reap the benefit.
Although we have no crystal ball, we believe that in three years time we will be reading articles about how easy money in Industrials was made. Until then, we will stand by our time-tested and disciplined investment process and continue to carefully monitor the Industrial stocks we hold.
We have three successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. If you have questions on any of these, or know others who might have an interest in our mailings, please call us.
Senior Portfolio Manager
Past performance is no guarantee of future results. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. 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.