Mid Cap Commentary – 1Q19
The first quarter of 2019 was a very different experience for investors than the last quarter of 2018. The defensive style stocks—food producers, soap manufacturers and utilities, for instance—where demand for their products varies little with the economic cycle, were the best performing stocks in late 2018. On the other hand, the stocks of more cyclical companies—think homebuilders or auto manufacturers—where demand for their product is more closely tied to the ups and downs in the economy, were the worst performers in late 2018. Everything switched in the first quarter–defensive stocks lagged and cyclical stocks surged. Overall, the Russell MidCap® Index swung from down 15.4% in the last quarter of 2018 to up 16.5% through the end of the first quarter in 2019.
What caused this reversal in the stock market? The answer is summed up by one word: fear. In December, 2018 investors feared recession; in March, 2019 investors feared missing out on market gains.
As I write this, not only is the economy moving higher, so is the temperature outside. Warmer temperatures result in what I call the three B’s: the first two, Baseball and Barbeque, are generally liked by people; the third B, Bugs, are not. Thankfully, an Argent MidCap Portfolio holding has a solution for the annoying third B: Service Master Global Holdings Inc. (SERV) or more commonly known as Terminix Pest Control. Argent’s Change-BasedSM investment approach looks for companies with favorable valuations that are undergoing a significant change that we feel could result in an acceleration in revenue and earnings growth. At the time of initial purchase, the valuation of Terminix was about one-third of its main competitor. This modest valuation was largely due in our opinion to poor execution on the prior management’s part, resulting in limited earnings growth. Our ears perked up, however, when the board started a search for a new CEO, eventually bringing in a top executive from Honeywell, a company with a long track record of solid execution. More change followed as the new CEO, Nik Varty, brought in a new leadership team, invested in new technology to improve operations and spun-off businesses that were less profitable than pest control. The result was an almost doubling of the stock price since we purchased it for the MidCap portfolio and an improvement in valuation to two-thirds of the main competitor. The good news is more good news–we have swarms of bugs to remind people they need pest control and another one-third of the way to go just to catch up with their main competitor.
Of note, we are particularly excited to mark the five year anniversary of the Argent Mid Cap Strategy. We are pleased with the performance of the strategy–outperforming the Russell Midcap® Index not only for the first quarter of 2019, but on a rolling three year and “since-inception” basis.
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-1Q19-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.