TREND MANAGEMENT 3RD QUARTER REPORT 2017
The S&P 500 started the quarter at 2423, and closed at 2519. A 3.93% gain. The Value Line composite, representing how the average stock is performing, went from $523.19 to $539. A gain of 3.05%. Those two statistics indicate the average investor is buying more established stocks, than smaller ones. This ongoing trend has caught our attention.
Go to our website, trendmanagementinc.com, to review our twenty-year, audited track record for an account we manage. We feel it fairly reflects how our accounts have performed during that time-frame. There have been many ups and downs in the stocks we own, which happens, when the average holding period per stock is over seven years.
During Trend Management’s first decade, we made minor changes on what type of value stocks we would buy. The approach was: Mark looked for struggling stocks in underperforming industries and bought them. The company’s quality was secondary to how cheap the stock was.
In 2008, Kelly and Brandon came in, and that style began to change. We started to analyze how cheap a stock was, and how solid a business it was. A big step for us was our ability to numerically define a good business, and we’re confident it has added value to our portfolios.
About three years ago, we introduced a macroeconomic view of the world, investing in commodities, including ETFs, gold stocks, and Latin American index funds. We thought they were too cheap, versus all other asset classes. They have worked out, so far.
Looking back at all the stocks we have owned during the last twenty years, it is safe to say there were some good decisions and some bad ones. Analysis involved brutal discussions between the three of us (four, when McCoy is in the office) speculating how much more money we would have gained, had weowned X, instead of Y. Yes, we beat the S&P 500 over the last two decades. We want to do even better. One area we have shied away from is buying growth stocks rather than value stocks. Why?
Value versus growth. Would you rather own a stock you think will make 9% a year, where its earnings don’t grow? Or is it better to buy one to earn 6% today, but projected to grow rapidly? We had to develop a mathematical way to judge what determinate growth rate of earnings to assume, and for how long.
It took nine months to solve the issues of what to pay for growth, and what current earnings minimum we will accept. We read and reread nearly a dozen books on this subject to educate ourselves on the issues. Brandon Robinson and Brandon McCoy did a great job figuring out how to follow four-thousand stocks of interest, on a quarterly basis.
We also let cash build up in your accounts, having sold IBM, and not reinvesting. We continue to expect receiving a big cash dividend from Level 3 this quarter, (October) when the Centurylink merger is done.
We plan to allocate up to 20% of your account’s assets in these growth stocks. The maximum initial purchase size of each stock will be 1%, or no more than 2%, of the value of your account. This means we could have up to twenty stocks in your account. It allows us to buy more, to lower our cost basis, should the market correct.
The markets today are at record highs, and so are our accounts. Other than the first half of 2015, we have been fully invested in stocks for ten years, holding minimal cash and bonds. We relied on the S&P’s historic earnings yield to determine the stock market was cheap. We also thought, and still do, that bonds are way overpriced. We were confident, the world’s Central Banks printing money for a decade would result in rising stock prices. It is altogether more difficult to invest in 2017, than it was in 2009-2016.
These facts complicate going all-in with our new system. If the earnings of the companies grow at their current rates, it won’t matter, long-term, what the S&P 500 does. These guys will grow through it. Companies with earnings’ growth are eventually rewarded with higher stock prices. However, first-year growth stocks have less margin for error, compared to value stocks.
There will be more turnover in this part of your account, than there has been in your value stocks. To compensate for not buying stocks as cheap as our value stocks, we will have less patience with a stock, if it messes up. Bet on growth, and if it doesn’t happen, it will be time to look elsewhere. Which means we might hold some growth stocks for three months or fewer. Hold one for less than a year? We didn’t like its earnings report, and sold out. That money will be reinvested in the next qualifying company. A growth stock held for eighteen months indicates a sustained winner and a higher stock price. Our goal is to ride the winners and sell the losers.
To compensate for the market’s higher levels, we dollar-cost average these stocks into the portfolio, buying at least one stock a month. The first is a tech stock, Skyworks Solutions, that manufactures chips for cellular phones. Apple represents 40% of Skyworks’ sales, and is ramping up for next year’s roll-out of 5G cell-phones and TVs. The stock was $112 at its high. We waited for a correction, and paid $100.32 on September 27th.
On some of the accounts, we are waiting for the merged CenturyLink/Level 3 dividend, probably arriving at the end of October, before we implement the growth stock system. At the current price for CenturyLink, the stock will yield 11.2%. Jeff Storey will run the combined company, and we think he is one of the best CEOs in America.
Maxwell Technologies continues to frustrate us. In April, it negotiated to sell 20% of the company to a Chinese investment firm, at $6.32. Maxwell planned to use those proceeds to develop a longer-lasting car battery. CFIUS, a government agency that regulates foreign acquisitions of U.S. companies, rejected the deal.
Maxwell then decided to do a convertible bond, with a strike price of $6.35. Issue a convertible bond on Wall Street, and traders will buy it for the 5.5% yield, and short the stock. In three days, Maxwell stock went from $6.20 to $5.00. We will continue to closely follow Maxwell.
For the year, our accounts are up, on average, between 8% and 10%. The biggest winners are: Apple, up 34%, BGC Partners, up 41%; Royal Gold, up 35%; and Latin American stocks up 27%. Biggest losers: Exxon, down 9%, and Omnicom, down 13%.
This split performance between the good and the bad reminds us, it’s still a market of stocks, and not a stock market. There will always be stocks going in opposite directions to the market. It’s our job to take advantage of it, when we can.
The Holiday party is going to be on December 21st at Highland Springs. Feel free to stop by anytime between 6 and 8. You will get an invitation after Thanksgiving.
If you would like a copy of our ADV and privacy disclosures please let us know. Feel free to call us with any questions you may have.
Sincerely,
Mark Brueggemann IAR Kelly SmithIAR Brandon RobinsonIAR