Mid Cap Commentary – 2Q18
For the second quarter of 2018, Argent’s Mid Cap strategy returned 0.03% (net of fees) behind the Russell Mid Cap® Index return of 2.8%. While we wish we could outperform every quarter, we expect to see this type of short-term performance on occasion. Argent is focused on investing for the long term and our strategy continues to outperform the Russell Mid Cap on a trailing one-year, three-year and since-inception basis (net of fees).
The first half of 2018 is in the books, and with it, we’ve seen two tailwinds for mid cap stocks: corporate tax reform and the strength of the U.S. dollar. Since the new tax plan was finalized in December, corporate tax rates have fallen from 35 percent to 21 percent. Mid cap companies tend to generate more of their revenue domestically, while large cap companies are likely to have more overseas exposure. With higher domestic revenues, mid caps are poised to receive greater benefits from the tax reform. The good news is that this increase in cash flow to mid cap companies should directly fuel growth, jobs and wages in the United States. Another tailwind for mid cap companies is the rising dollar. Since most mid caps’ revenues are domestic, they tend to be more insulated than large companies, whose goods and services can become more expensive for foreign buyers when the dollar is strong.
Mid cap stocks are often overlooked by the media – they are U.S. companies that are large enough to be stable businesses, but are frequently not yet household names. One such company, headquartered in Baton Rouge, Louisiana, is Amedisys, one of the largest providers of personalized home health and hospice care services in the country. Amedisys piqued our interest as industry reports indicated the home care industry is growing twice as fast as the overall economy with multiple growth tailwinds, including an aging population and lower costs compared to hospital-based care.
In order to add a company to an Argent portfolio, it must meet the criteria outlined in our Change-BasedSM investment process. Two of these criteria are being able to identify positive change occurring in the company, and accelerating earnings or revenues as a result of the change. Several years ago, despite the growth in the home health care industry, Amedisys had operational problems that caused poor quality of care, high employee turnover and lower payments from Medicare and other insurance customers. In 2017, a new senior leadership team was brought in to manage a company turnaround. The new Chief Executive Officer realigned management compensation to incentivize both himself and his team to focus on the problem areas. The management team now gets paid more if they improve the quality of care, which results in better patient outcomes, higher payments from insurers and reduced employee turnover. This positive change resulted in a 40% growth in earnings over the past year and made Amedisys an attractive addition to Argent’s Mid Cap strategy.
As always, we appreciate your interest in Argent Capital Management. We have four very successful equity strategies – Large Cap U.S., Small Cap U.S., Dividend Select and Mid Cap U.S. We are very proud of all, and if you have questions on any of these, or know others who might have an interest in our strategies and mailings, please call us.
PDF Version: MC Market Overview – 2Q18 – final
Portfolio Manager & Senior Research Analyst, Quantitative
This is supplied as supplemental information to the composite disclosures presented later in this document. 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.