Large Cap Commentary -July 2017
In our line of work, change is inevitable and the fortunes of industries and sectors can change, sometimes dramatically. A portion of our job is to recognize change and adjust our portfolio accordingly. A few months ago, I wrote about our specialty pharmaceuticals holdings. If you recall, we increased our exposure as a positive “change”, namely acceleration in mergers and acquisitions, was taking place within the industry. The poster child for this change was Valeant Pharmaceutical (VRX). In early 2010 VRX’s stock was trading at $10 per share. By mid-2015 the stock reached a peak of $250 per share. However, things changed and the specialty pharmaceutical industry and VRX quickly unraveled. Today, VRX stock is trading at $15 per share. At Argent, we never invested in VRX, primarily because of concern about their management, but we did like the industry for a time. Fortunately, we began to sell out of our exposure to specialty pharmaceuticals before the collapse occurred as valuations had begun to more fully reflect the positive change within the industry. In other words, the positive change was gone.
I bring up this example as we are currently witnessing a similar change within the food industry. Much like specialty pharmaceuticals, the food industry underwent significant change at the beginning of 2008 when InBev bought Anheuser-Busch. InBev was financially backed by 3G Capital, a Brazil-based investment firm. 3G’s transformation of the food industry only continued from that point as the company later bought Burger King and took it private, and they also acquired the Kraft Heinz Company. Along the way, 3G introduced a zero based budgeting model, which is a system of cost controls to drive profit expansion for companies. This model spread throughout the food industry. As the industry was changing due to consolidation, we increased our exposure by adding Hain Celestial (HAIN) and ConAgra Foods (CAG) to our portfolio as well as adding to our existing position in Post Holdings (POST).
Once again, much like specialty pharmaceuticals, once consolidation had slowed and costs were cut, sales and earnings for the food group decelerated. At Argent, we noticed that the operating environment for the food industry was becoming more difficult and therefore reduced our exposure. Today, our lone food holding is POST, where we continue to believe in the management team’s ability to execute on strategy. The chart illustrates the percentage decline in sales within the food industry over the past years and how POST continues to excel when compared to peers.
In closing, change on a company level and an industry level can bring opportunities that reward shareholders handsomely. This is a tenant of our change-based investment philosophy. So too is the understanding that some drivers of change are finite and time sensitive. At Argent, we are consistently aware of this possibility and adjust our portfolio accordingly while we look to identify the newest change to drive shareholder value.
We have three successful equity strategies – Large Cap, Small Cap 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.