Mid Cap Commentary – 4Q18
The fourth quarter of 2018 turned out to be a bit of a rough ride for the market. Investors entered 2018 with high expectations on solid GDP growth and continued strong corporate earnings and sales. The story changed as the year saw four more rate hikes by the Federal Reserve, a ratcheting up of global trade war disputes and slowing global growth. All of the optimism we saw heading into 2018 ended in investor pessimism during the fourth quarter. In October, investors “threw in the towel” on the economy and moved into expensive recessionary or defensive style stocks (think utility companies). In general, these types of stocks are low growth and expensive by Argent’s standards.
At Argent, we know the market can be fickle and investors feel the pull to own the type of stocks that are working in the moment. That is why we follow a disciplined, Changed BasedSM investment approach. We look for companies with favorable valuations that are undergoing a significant change that we believe will result in an acceleration in growth and earnings. A sound process helps us look past market volatility and transient periods of underperformance. While the fourth quarter saw investors pouring into expensive, recessionary stocks, we remained true to our investment process. Two companies in the Mid Cap portfolio that exhibit change with attractive valuations are Zebra Technologies and Advanced Auto Parts Inc.
Advanced Auto Parts, another Mid Cap holding, is a Virginia based retailer of automotive parts and accessories. We started to see a positive change occurring in Advanced Auto Parts in 2016 when the company hired a PepsiCo executive, Thomas Greco as its chief executive. Advanced Auto Parts was suffering from poor logistics management which was leading to lower margins than industry peers. Greco had a reputation for transforming supply chains at PepsiCo and we saw this new addition to leadership as a positive change for the company. Advanced Auto Parts is another company where the market is beginning to recognize the positive fundamentals of the business and resulted in earnings estimated for 2020 jumping from $8.87 when we purchased the company in September to $9.58 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 -4Q18
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.