Mid Cap Commentary – 3Q18
For the third quarter of 2018, Argent’s Mid Cap strategy returned 7.7% (net of fees) ahead of the Russell Mid Cap® Index return of 5.0%. While we are happy to deliver this type of short-term performance, Argent is focused on investing for the long term and we are excited that our strategy continues to outperform the Russell Mid Cap on a trailing one-year, three-year and since-inception basis (net of fees).
Some aspects of today’s stock market remind me of a quote from Warren Buffet: “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.” While the stock market as a whole is higher (the Russell Mid Cap benchmark is up almost 7.5% from beginning of the year through September), this performance is driven to a large extent by the most expensive stocks getting even more expensive. This is what we refer to as a narrow market. Narrowness in and of itself is not a cause for concern. Where Argent has concern is in the “valuation” that has been accorded some of the stocks leading the Russell Mid Cap higher. Argent’s Change-BasedSM investment approach looks for companies that are undergoing a significant change that we believe will result in an acceleration in growth, and are trading at reasonable prices.
Many times, mid cap stocks are less well-known, resulting in little to no attention from the media or analyst community. This assists us in finding interesting names undergoing changes that are still trading at attractive valuations. For example, one of the recent additions to the portfolio, Helen of Troy, Ltd. (HELE), is not a household name but has a product in almost every home. Headquartered in El Paso, Texas, Helen of Troy manufactures and distributes personal care and household product brands including Revlon, Vicks, Braun and PUR, among others. Helen of Troy initially caught our attention because it began trading at a very attractive valuation, despite its portfolio of solid brand names and steadily growing earnings.
On closer evaluation of the company, we realized it was undergoing significant changes. The company named a new CEO, Julien Mininberg, in 2014. He replaced the company’s founder, Jerry Rubin, who retired after 50 years. Before the appointment of the new CEO, Helen of Troy grew largely through acquisition and was organized in silos. Today, Mr. Mininberg has transformed the company by consolidating operations so services are shared across the organization. Now, Helen of Troy can take advantage of its size to operate more efficiently. The company also sold its underperforming nutritional supplements business, which resulted in a boost for margins and growth. The results of the transformation are starting to come to fruition, with gross margins growing from 39% when Mr. Mininberg took over to 43% today, and earnings estimates for 2018 jumping from $7.02 in January to $7.68 currently.
As always, we appreciate your interest in Argent Capital Management. We have four very successful equity strategies – Large Cap, Small Cap, Dividend Select and Mid Cap. We are very proud of them 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 – 3Q18_Final
Portfolio Manager & Senior Research Analyst, Quantitative
Performance results are net of fees. Past performance is no guarantee of future results. This is supplied as supplemental information to the composite disclosures presented later in this document. 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 were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.